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On a Heath-Jarrow-Morton approach for stock options

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  • Jan Kallsen
  • Paul Kruhner

Abstract

This paper aims at transferring the philosophy behind Heath-Jarrow-Morton to the modelling of call options with all strikes and maturities. Contrary to the approach by Carmona and Nadtochiy (2009) and related to the recent contribution Carmona and Nadtochiy (2012) by the same authors, the key parametrisation of our approach involves time-inhomogeneous L\'evy processes instead of local volatility models. We provide necessary and sufficient conditions for absence of arbitrage. Moreover we discuss the construction of arbitrage-free models. Specifically, we prove their existence and uniqueness given basic building blocks.

Suggested Citation

  • Jan Kallsen & Paul Kruhner, 2013. "On a Heath-Jarrow-Morton approach for stock options," Papers 1305.5621, arXiv.org, revised Aug 2013.
    • Handle: RePEc:arx:papers:1305.5621
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    File URL: http://arxiv.org/pdf/1305.5621
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    References listed on IDEAS

    as
    1. René Carmona & Sergey Nadtochiy, 2012. "Tangent Lévy market models," Finance and Stochastics, Springer, vol. 16(1), pages 63-104, January.
    2. René Carmona & Sergey Nadtochiy, 2009. "Local volatility dynamic models," Finance and Stochastics, Springer, vol. 13(1), pages 1-48, January.
    3. Denis Belomestny & Markus Reiß, 2006. "Spectral calibration of exponential Lévy models," Finance and Stochastics, Springer, vol. 10(4), pages 449-474, December.
    4. René Carmona & Sergey Nadtochiy, 2011. "Tangent Models As A Mathematical Framework For Dynamic Calibration," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 14(01), pages 107-135.
    5. Denis Belomestny & Markus Reiß, 2006. "Spectral calibration of exponential Lévy models," Finance and Stochastics, Springer, vol. 10(4), pages 449-474, December.
    6. Unknown, 2005. "Forward," 2005 Conference: Slovenia in the EU - Challenges for Agriculture, Food Science and Rural Affairs, November 10-11, 2005, Moravske Toplice, Slovenia 183804, Slovenian Association of Agricultural Economists (DAES).
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    Cited by:

    1. Christa Cuchiero & Claudio Fontana & Alessandro Gnoatto, 2016. "A general HJM framework for multiple yield curve modelling," Finance and Stochastics, Springer, vol. 20(2), pages 267-320, April.

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