Heterogeneous Information Arrival and Option Pricing
NBER Working Paper No. 5950
We model the arrival of heterogeneous information in a financial market as a doubly-stochastic Poisson process (DSPP). A DSPP is a member of the family of Poisson processes in which the mean value of the process itself is governed by a stochastic mechanism. We explore the implications for pricing stock, index and foreign currency options of the assumption that the under- lying security evolves as a mixed diffusion DSPP. We derive an intertemporal CAPM and demonstrate that accounting for heterogeneous information arrival may minimize the ubiquitous pricing bias 'smile-effect' of standard option pricing models. We propose a conceptually simple but numerically intensive maximum likelihood estimator of the parameters of a DSPP. A simulation study verifies the adequacy of the asymptotic approximations in finite samples.
Document Object Identifier (DOI): 10.3386/w5950
Published: Asea, Patrick K. & Ncube, Mthuli, 1998. "Heterogeneous information arrival and option pricing," Journal of Econometrics, Elsevier, vol. 83(1-2), pages 291-323. citation courtesy of
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