Jump Telegraph-Diffusion Option Pricing
Nikita Ratanov, Universidad del Rosario
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ABSTRACT:
The paper develops a class of Financial market models with jumps based on a Brownian motion, and inhomogeneous telegraph processes: random motions with alternating velocities. We assume that jumps occur when the velocities are switching. The distribution of such a process is described in detail. For this model we
obtain the structure of the set of martingale measures. The model can be completed adding another asset based on the same sources of randomness. Explicit formulae for prices of standard European options in completed market are obtained.
SUGGESTED CITATION:
Nikita Ratanov,
"Jump Telegraph-Diffusion Option Pricing"
(April 2008).
UNIMI - Research Papers in Economics, Business, and Statistics.
Statistics and Mathematics.
Working Paper 33.
http://services.bepress.com/unimi/statistics/art33
Paper presented by C. Tommasi.
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