Valuing options in shot noise market

DOI10.1016/J.PHYSA.2018.02.113MaRDI QIDQ2149143zbMATH OpenOpenAlexWikidataFDO

Authors Nick Laskin

Publication date 28 June 2022

Published in Physica A (Search for Journal in Brave)

Full work available at URL https://doi.org/10.1016/j.physa.2018.02.113

zbMATH Keywords

Black-Scholes equationGreen functionjump-diffusion processesoption pricingshot noise

Mathematics Subject Classification ID

Green's functions for elliptic equations (35J08) Integro-partial differential equations (45K05) Applications of Brownian motions and diffusion theory (population genetics, absorption problems, etc.) (60J70) Derivative securities (option pricing, hedging, etc.) (91G20)

Review text

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.

Recommendations

• A FORWARD LOOKING, SINGULAR PERTURBATION APPROACH TO PRICING OPTIONS UNDER MARKET UNCERTAINTY AND TRADING NOISE
• The Valuation of Volatility Options
• Valuing qualitative options with stochastic volatility
• Valuation of exotic options under shortselling constraints
• Option prices under stochastic volatility
• scientific article; zbMATH DE number 2063837
• scientific article; zbMATH DE number 1222791
• Option Pricing With Markov-Modulated Dynamics
• The pricing of options on assets with stochastic volatilities

Cites work

• Delay in claim settlement and ruin probability approximations
• Dynamics of Markets
• Explosive Poisson shot noise processes with applications to risk reserves
• scientific article; zbMATH DE number 3114766 (Why is no real title available?)
• scientific article; zbMATH DE number 3863589 (Why is no real title available?)
• scientific article; zbMATH DE number 1257656 (Why is no real title available?)
• scientific article; zbMATH DE number 939794 (Why is no real title available?)
• Introduction to Econophysics
• Mathematical Analysis of Random Noise
• Non-Gaussian diffusion
• Option pricing when underlying stock returns are discontinuous
• Technical Note—A Note on Shot-Noise and Reliability Modeling
• The pricing of options and corporate liabilities

Cited in

(3)

• Finite difference method for the two-dimensional Black-Scholes equation with a hybrid boundary condition
• Shout options: A framework for pricing contracts which can be modified by the investor
• Stochastic equations and equations for probabilistic characteristics of processes with damped jumps

This page was built for publication: Valuing options in shot noise market

Report a bug (only for logged in users!)Click here to report a bug for this page (MaRDI item Q2149143)