Information-Time Option Pricing: Theory and Empirical Evidence

Author

Carolyn W. CHANG, National University of Singapore
Jack S. K CHANG, National University of Singapore
Kian Guan LIM, Singapore Management UniversityFollow

Publication Type

Journal Article

Publication Date

5-1998

Abstract

With a stochastic time change from calendar-time to information-time, we derive a parsimonious option pricing formula with stochastic volatility as a risk-neutral Poisson sum of Merton's (1973) prices over the option's information-time maturity domain. The formula contains two unobservable parameters, information arrival intensity and information-time asset volatility, with stochastic volatility induced by random information arrival. When the information arrival rate intensifies, the option price increases and vice-versa. We test the formula in pricing, hedging, and excess profits capture empirically using currency and the S&P 500 futures options transaction data

Keywords

Information-time, Information arrival speed, Option pricing, Stochastic time change, Stochastic volatility

Discipline

Business | Finance and Financial Management

Research Areas

Finance

Publication

Journal of Financial Economics

Volume

48

Issue

2

First Page

211

Last Page

242

ISSN

0304-405X

Identifier

10.1016/s0304-405x(98)00009-9

Publisher

Elsevier

Citation

CHANG, Carolyn W.; CHANG, Jack S. K; and LIM, Kian Guan. Information-Time Option Pricing: Theory and Empirical Evidence. (1998). Journal of Financial Economics. 48, (2), 211-242.
Available at: https://ink.library.smu.edu.sg/lkcsb_research/2261

Additional URL

https://doi.org/10.1016/s0304-405x(98)00009-9