EconPapers    
Economics at your fingertips  
 

Option Pricing with Discrete Rebalancing

Jean-Luc Prigent (), O. Renault and Olivier Scaillet ()
Additional contact information
O. Renault: UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES)

No 1999029, Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) from Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES)

Abstract: We consider option pricing when dynamic portfolios are discretely rebalanced. The portfolio adjustments only occur after fixed relative variation of the stock price. The stock price follows a marked point process and the market is incomplete. We first characterize the equivalent martingale measures. An explicit formula based on the minimal martingale measure is then provided together with the hedging strategy underlying portfolio adjustments. Under adequate conditions on the stock price dynamics, the minimal pricing formula converges to the Black-Scholes formula when the triggering price increment shrinks to zero. This is shown theoretically and numerically on two examples : a marked Poisson process and a jump process driven by a latent geometric Brownian motion. For the empirical application we use IBM intraday transaction data and compare option prices given by the marked Poisson model and the Black-Scholes model.

Keywords: Weak convergence; incomplete markets; option pricing; minimal martingale measure; discrete rebalancing; marked point process (search for similar items in EconPapers)
JEL-codes: D52 G13 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fmk
Date: 1999-02-01, Revised 1999-10
References: View complete reference list from CitEc
Citations View citations in EconPapers (1) Track citations by RSS feed

Downloads: (external link)
http://sites.uclouvain.be/econ/DP/IRES/9929.pdf (application/pdf)

Related works:
Journal Article: Option pricing with discrete rebalancing (2004) Downloads
Working Paper: Option Pricing with Discrete Rebalancing (2002) Downloads
Working Paper: Option Pricing with Discrete Rebalancing (1999) Downloads
Working Paper: Option pricing with discrete rebalancing (1999)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:ctl:louvir:1999029

Access Statistics for this paper

More papers in Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) from Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES)
Address: Place Montesquieu 3, 1348 Louvain-la-Neuve (Belgium)
Contact information at EDIRC.
Series data maintained by Anne DAVISTER-LOGIST ().

 
Page updated 2014-04-23
Handle: RePEc:ctl:louvir:1999029