Occupation Times for Time-changed Processes with Applications to Parisian Options

Joonyong Choi; David Clancy Jr

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arXiv · 2110.07639

Occupation Times for Time-changed Processes with Applications to Parisian Options

Joonyong Choi·David Clancy Jr

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Abstract

Stochastic processes time-changed by an inverse subordinator have been suggested as a way to model the price of assets in illiquid markets, where the jumps of the subordinator correspond to periods of time where one is unable to sell an asset. We develop an excursion theory for time-changed reflected Brownian motion and use this to express the price of certain European options with Parisian barrier condition in terms of solutions of a time-fractional PDE. We provide a general description of the occupation measures of time-changed processes and use this to prove a Ray-Knight theorem for the occupation measure of a time-changed Brownian motion with negative drift. We also show that the duration of the excursions on finite time intervals obey a Poisson-Dirichlet distribution when a reflected Brownian motion is time-changed by an inverse stable subordinator.

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BibTeX RIS

Joonyong Choi, David Clancy Jr. 2021-10-14. Occupation Times for Time-changed Processes with Applications to Parisian Options. https://arxiv.org/abs/2110.07639

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