Journal of Applied Probability
- J. Appl. Probab.
- Volume 49, Number 3 (2012), 838-849.
Option pricing driven by a telegraph process with random jumps
In this paper we propose a class of financial market models which are based on telegraph processes with alternating tendencies and jumps. It is assumed that the jumps have random sizes and that they occur when the tendencies are switching. These models are typically incomplete, but the set of equivalent martingale measures can be described in detail. We provide additional suggestions which permit arbitrage-free option prices as well as hedging strategies to be obtained.
J. Appl. Probab., Volume 49, Number 3 (2012), 838-849.
First available in Project Euclid: 6 September 2012
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Mathematical Reviews number (MathSciNet)
Zentralblatt MATH identifier
Secondary: 60J27: Continuous-time Markov processes on discrete state spaces 60J75: Jump processes
López, Oscar; Ratanov, Nikita. Option pricing driven by a telegraph process with random jumps. J. Appl. Probab. 49 (2012), no. 3, 838--849. doi:10.1239/jap/1346955337. https://projecteuclid.org/euclid.jap/1346955337