Authors: Enrico Scalas; Mauro Politi
Addresses: Dipartimento di Scienze e Innovazione Tecnologica, Università del Piemonte Orientale, Viale T. Michel 11, 15121, Alessandria, Italy; BCAM, Basque Centre for Applied Mathematics, Alameda de Mazarredo 14, 48009 Bilbao, Bilbao, Basque Country, Spain ' BCAM, Basque Centre for Applied Mathematics, Alameda de Mazarredo 14, 48009 Bilbao, Bilbao, Basque Country, Spain
Abstract: Compound renewal processes can be used as an approximate phenomenological model of tick-by-tick price fluctuations. An exact and explicit general formula is derived for the martingale price of a European call option written on a compound renewal process. The option price is obtained using the direct method of indicator functions. The applicability of this result is discussed.
Keywords: option pricing; high-frequency finance; high-frequency trading; computer trading; jump-diffusion models; pure-jump models; continuous-time random walks; semi-Markov processes; price fluctuations; martingale price; European call options; compound renewals.
International Journal of Applied Nonlinear Science, 2013 Vol.1 No.1, pp.76 - 86
Available online: 15 Mar 2013 *Full-text access for editors Access for subscribers Purchase this article Comment on this article