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Article

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Accepted version

Publication date

2008

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Please use this identifier to cite or link to this item: https://hdl.handle.net/2445/34159

Renewal equations for option pricing

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http://dx.doi.org/10.1140/epjb/e2008-00349-8

Abstract

In this paper we will develop a methodology for obtaining pricing expressions for financial instruments whose underlying asset can be described through a simple continuous-time random walk (CTRW) market model. Our approach is very natural to the issue because it is based in the use of renewal equations, and therefore it enhances the potential use of CTRW techniques in finance. We solve these equations for typical contract specifications, in a particular but exemplifying case. We also show how a formal general solution can be found for more exotic derivatives, and we compare prices for alternative models of the underlying. Finally, we recover the celebrated results for the Wiener process under certain limits.

Subject

Rutes aleatòries (Matemàtica), Processos estocàstics, Economia

Subject (English)

Random walks (Mathematics), Stochastic processes, Economics

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Articles publicats en revistes (Física de la Matèria Condensada)

Citation

MONTERO TORRALBO, Miquel. Renewal equations for option pricing. European Physical Journal B. 2008. Vol. 65, num. 2, pags. 295-306. ISSN 1434-6028. [consulted: 13 of August of 2026]. Available at: https://hdl.handle.net/2445/34159

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