Limit theorems for prices of options written on semi-Markov processes
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Abstract: We consider plain vanilla European options written on an underlying asset that follows a continuous time semi-Markov multiplicative process. We derive a formula and a renewal type equation for the martingale option price. In the case in which intertrade times follow the Mittag-Leffler distribution, under appropriate scaling, we prove that these option prices converge to the price of an option written on geometric Brownian motion time-changed with the inverse stable subordinator. For geometric Brownian motion time changed with an inverse subordinator, in the more general case when the subordinator's Laplace exponent is a special Bernstein function, we derive a time-fractional generalization of the equation of Black and Scholes.
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Cited in
(9)- A note on intraday option pricing
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- scientific article; zbMATH DE number 1897410 (Why is no real title available?)
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