Information-Time Option Pricing: Theory and Empirical Evidence
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
