14 Pages Posted: 20 Feb 2012
Date Written: 2012
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.
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
Suggested Citation: Suggested Citation
Scalas, Enrico and Politi, Mauro, A Parsimonious Model for Intraday European Option Pricing (2012). Economics Discussion Paper No. 2012-14. Available at SSRN: https://ssrn.com/abstract=2007737 or http://dx.doi.org/10.2139/ssrn.2007737
By Robert Engle