Coupled continuous-time random walk approach to the Rachev–Rüschendorf model for financial data

In this paper we expand the Rachev–Rüschendorf asset-pricing model introducing a coupled continuous-time-random-walk-(CTRW)-like form of the random number of price changes. Such a form results from the concept of the random clustering procedure (that resembles the coarse-graining methods of statisti...

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Bibliographic Details
Published in:Physica A 2009-02, Vol.388 (4), p.407-418
Main Authors: Jurlewicz, Agnieszka, Wyłomańska, Agnieszka, Żebrowski, Piotr
Format: Article
Language:English
Subjects:
Alternative model
Black–Scholes formula
Continuous-time random walk
Cox–Ross–Rubinstein model
Log-returns of financial instruments
Randomization
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Summary:In this paper we expand the Rachev–Rüschendorf asset-pricing model introducing a coupled continuous-time-random-walk-(CTRW)-like form of the random number of price changes. Such a form results from the concept of the random clustering procedure (that resembles the coarse-graining methods of statistical physics) and, on the other hand, indicates applicability of the CTRW idea, widely used in physics to model anomalous diffusion, for describing financial markets. In the framework of the proposed model we derive the limiting distributions of log-returns and the corresponding pricing formulas for European call option. In order to illustrate the obtained theoretical results we present their fitting with several sets of financial data.
ISSN:0378-4371
1873-2119
DOI:10.1016/j.physa.2008.10.041