Option Pricing Driven by a Telegraph Process with Random Jumps
Authors:
- 1 June 2012
- journal article
- research article
- Published by Cambridge University Press (CUP) in Journal of Applied Probability
- Vol. 49 (03) , 838-849
Abstract
In this paper we propose a class of financial market models which are based on telegraph processes with alternating tendencies and jumps. It is assumed that the jumps have random sizes and that they occur when the tendencies are switching. These models are typically incomplete, but the set of equivalent martingale measures can be described in detail. We provide additional suggestions which permit arbitrage-free option prices as well as hedging strategies to be obtained.Keywords
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