|
| |
| Trading Volume in Models
of Financial Derivatives
Sam Howison, David lamper
Abstract
This paper develops a subordinated stochastic process model
for the asset price, where the directing process is identified as
information. Motivated by recent empirical and theoretical work, we make
use of the under-used market statistic of transaction count as a suitable
proxy for the information flow. An option pricing formula is derived, and
comparisons with stochastic volatility models are drawn. Both the asset
price and the number of trades are used in parameter estimation. The
underlying process is found to be fast mean reverting, and this is
exploited to perform an asymptotic expansion. The implied volatility skew
is then used to calibrate this model.
Click
here to download paper (390 kB)
|
|
