Discussion Paper

No. 2012-14 |
February 15, 2012

A Parsimonious Model for Intraday European Option Pricing

## Abstract

A stochastic model for pure-jump diffusion (the compound renewal process) can be used as a zero-order approximation and as a phenomenological description of tick-by-tick price fluctuations. This leads to an exact and explicit general formula for the martingale price of a European call option. A complete derivation of this result is presented by means of elementary probabilistic tools.

## Comments and Questions