JSM 2005 Online Program

Abstract #302947

This is the preliminary program for the 2005 Joint Statistical Meetings in Minneapolis, Minnesota. Currently included in this program is the "technical" program, schedule of invited, topic contributed, regular contributed and poster sessions; Continuing Education courses (August 7-10, 2005); and Committee and Business Meetings. This on-line program will be updated frequently to reflect the most current revisions.

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Activity Number:	267
Type:	Contributed
Date/Time:	Tuesday, August 9, 2005 : 10:30 AM to 12:20 PM
Sponsor:	Business and Economics Statistics Section
Abstract - #302947
Title:	Option Pricing and Hedging for Stock Prices with Discrete Jumps and Stochastic Intensity Rate
Author(s):	Rituparna Sen*+
Companies:	University of California, Davis
Address:	255 Sonoma Way, Woodland, CA, 95695, United States
Keywords:	Birth and Death process ; Bayesian Filtering ; Edgeworth Expansion ; onvergence of Stochastic Processes ; Statistical Simulation ; Hidden Markov Model
Abstract:	We examine the pricing and hedging of derivative securities on stocks whose price follows a birth and death process with stochastic intensity rate. We find that one needs the stock and another market traded option to hedge an option in this setting. We derive the results explicitly when the intensity rate follows a two-state Markov process and outline ways of generalizing this to other models for the evolution of the intensity rate. We establish the risk-neutral measure and describe the algorithm for inverting option prices to get values of the unknown parameters in the model. We show one needs to use filtering equations for updating parameter values and present those equations for the general case.

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