Time-changed Lévy processes and option pricing: a critical comment

56 Pages Posted: 18 Aug 2018 Last revised: 11 Aug 2020

Date Written: August 6, 2018

Abstract

Carr and Wu (2004), henceforth CW, developed a framework that encompasses almost all of the continuous-time models proposed in the option pricing literature. Their framework hinges on the stopping time property of the time changes. By ana- lyzing the measurability of the time changes with respect to the underlying filtration, we show that many asset price models using correlated time changes fail to satisfy this assumption.

Keywords: Jumps, Time Changes, Business Time

JEL Classification: G10, G12, G13

Suggested Citation

Fallahgoul, Hasan A and Nam, Kihun, Time-changed Lévy processes and option pricing: a critical comment (August 6, 2018). Available at SSRN: https://ssrn.com/abstract=3226748 or http://dx.doi.org/10.2139/ssrn.3226748

Hasan A Fallahgoul (Contact Author)

Monash University ( email )

Clayton Campus
Victoria, 3800
Australia

HOME PAGE: http://www.hfallahgoul.com

Kihun Nam

Monash University ( email )

23 Innovation Walk
Wellington Road
Clayton, Victoria 3800
Australia

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