Jump telegraph processes and financial markets with memory (Q2478418)

This paper is a continuation of the author's several papers [e.g. ``A jump telegraph model for option pricing'', Quant. Finance 7, No. 5, 575--583 (2007; Zbl 1151.91535)], where the logarithm of the risky asset is modeled by a Markov switching process, a generalised telegragh process, involving a pair of alternative switching Poisson rates \( \lambda_{\pm } \), coming up with alternative velocity values \( c_{\pm } \) and alternative jumps \( h_{\pm } \). The transition density, mean and variance of such process are derived explicitly. The author uses this model to desceribe a complete market without arbitrage. The existence of risk neutral neasure of this process is proved under some appropriete conditions linking with the model parameters to the alternative interest rates \( r_{\pm } \) of the risk-free asset. A pricing formulae of European option is given. The convergence of the underlying model to the Black-Scholes model in the sence of distribution is obtained under some scaling assumption. Finally, the memory effect and historical volatility of the model is also considered.