A Shot Noise Model for Financial Assets
International Journal of Theoretical and Applied Finance
Posted: 26 Apr 2010 Last revised: 6 May 2010
Date Written: February 1, 2008
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
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