Valuing options in shot noise market (Q2149143)

The author considers an option pricing in a generalization of the Black-Scholes model. In the model he assumes that the stock price can be described by a geometric shot noise process, i.e. the price \(S_t\) is given by the following stochastic differential equation: \[ dS_t = S_t F_t dt, \] where \(F_t\) is a shot noise process, which is generated by a series of random shocks decaying with time: \[ F(t) = \sum_{k=1}^n \eta_k \varphi(t-t_k) \] (\(\eta_k\) are independent random shocks that occur at random times \(t_k\) and \(\varphi\) is the response function). The author deals with the problem of pricing of call and put options in such a model. He considers an integro-differential equation for the price function and provides a solution formula using the Green's function method. He also derives the formulas for the Greek coefficients. At the end he shows that the standard option pricing formulas in the Black-Scholes model or in the Merton's jump-diffusion model are limiting cases of the formulas derived in the paper.