A parsimonious model for intraday European option pricing
Enrico Scalas, Mauro Politi
TL;DR
This paper introduces a simple yet effective stochastic model for intraday European option pricing, providing explicit formulas for option prices based on pure-jump processes, with derivations using elementary probabilistic methods.
Contribution
It presents a novel parsimonious model for intraday European options and derives explicit pricing formulas using elementary probabilistic tools.
Findings
Exact formula for European call option price under the model
Model captures tick-by-tick price fluctuations
Provides a zero-order approximation for intraday options
Abstract
A stochastic model for pure-jump diffusion (the compound renewal process) can be used as a zero-order approximation and as a phenomenological description of tick-by-tick price fluctuations. This leads to an exact and explicit general formula for the martingale price of a European call option. A complete derivation of this result is presented by means of elementary probabilistic tools.
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Taxonomy
TopicsStochastic processes and financial applications · Complex Systems and Time Series Analysis · Advanced Thermodynamics and Statistical Mechanics