Derivatives pricing with marked point processes using tick-by-tick data

Álvaro Cartea ()

Quantitative Finance, 2013, vol. 13, issue 1, 111-123

Abstract: I propose to model stock price tick-by-tick data via a non-explosive marked point process. The arrival of trades is driven by a counting process in which the waiting time between trades possesses a Mittag--Leffler survival function and price revisions have an infinitely divisible distribution. I show that the partial-integro-differential equation satisfied by the value of European-style derivatives contains a non-local operator in time-to-maturity known as the Caputo fractional derivative. Numerical examples are provided for a marked point process with conditionally Gaussian and with conditionally CGMY price innovations. Furthermore, the infinitesimal generator of the marked point process derived to price derivatives coincides with that of a L�vy process of either finite or infinite activity.

Date: 2013
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Working Paper: Derivatives pricing with marked point processes using Tick-by-tick data (2010)
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DOI: 10.1080/14697688.2012.661447

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