A Shot Noise Model for Financial Assets

International Journal of Theoretical and Applied Finance

Posted: 26 Apr 2010 Last revised: 6 May 2010

See all articles by Thorsten Schmidt

Thorsten Schmidt

University of Freiburg

Winfried Stute

University of Giessen

Date Written: February 1, 2008

Abstract

In this article we propose and study a model for stock prices which allows for shot-noise effects. This means that abrupt changes caused by jumps may fade away as time goes by. This model is incomplete. We derive the minimal martingale measure in discrete and continuous time and discuss the associated hedging strategy. Finally, a simulation study is included to show that our model is able to produce smile effects.

Keywords: Shot-noise component, jump diffusion, minimal martingale measure

Suggested Citation

Schmidt, Thorsten and Stute, Winfried, A Shot Noise Model for Financial Assets (February 1, 2008). International Journal of Theoretical and Applied Finance, Available at SSRN: https://ssrn.com/abstract=1515623

Thorsten Schmidt (Contact Author)

University of Freiburg ( email )

Fahnenbergplatz
Freiburg, D-79085
Germany

Winfried Stute

University of Giessen ( email )

Betriebswirtschaftslehre VII
Giessen, WY 35394
Germany

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