A Parsimonious Model for Intraday European Option Pricing

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.

Number of Pages in PDF File: 14

Keywords: Option pricing, high-frequency finance, high-frequency trading, computer trading, jump-diffusion models, pure-jump models, continuous time random walks, semi-Markov processes

JEL Classification: G13

working papers series