Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/239407 
Year of Publication: 
2020
Citation: 
[Journal:] Journal of Risk and Financial Management [ISSN:] 1911-8074 [Volume:] 13 [Issue:] 12 [Publisher:] MDPI [Place:] Basel [Year:] 2020 [Pages:] 1-33
Publisher: 
MDPI, Basel
Abstract: 
Using the Donsker-Prokhorov invariance principle, we extend the Kim-Stoyanov-Rachev-Fabozzi option pricing model to allow for variably-spaced trading instances, an important consideration for short-sellers of options. Applying the Cherny-Shiryaev-Yor invariance principles, we formulate a new binomial path-dependent pricing model for discrete- and continuous-time complete markets where the stock price dynamics depends on the log-return dynamics of a market influencing factor. In the discrete case, we extend the results of this new approach to a financial market with informed traders employing a statistical arbitrage strategy involving trading of forward contracts. Our findings are illustrated with numerical examples employing US financial market data. Our work provides further support for the conclusion that any option pricing model must preserve valuable information on the instantaneous mean log-return, the probability of the stock's upturn movement (per trading interval), and other market microstructure features.
Subjects: 
path-dependent binomial option pricing
Donsker-Prokhorov invariance principle
Cherny-Shiryaev-Yor invariance principle
informed traders
statistical arbitrage based on forward contracts
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by Logo
Document Type: 
Article

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