Tuesday June 19 2012
Scuola Normale Superiore
DISIT, Università del Piemonte Orientale and Basque Center for Applied Mathematics, Bilbao
A stochastic model for pure-jump diffusion (the compound renewal process) can be used as a zero-order approximation and as a phenomenological description of tick-by-tick price fluctuations. This leads to an exact and explicit general formula for the martingale price of a European call option. A complete derivation of this result is presented by means of elementary probabilistic tools.
Reference: Scalas E. and Politi M. (2012). A parsimonious model for intraday European option pricing. Economics Discussion Papers, No 2012-14, Kiel Institute for the World Economy.