On a Heath-Jarrow-Morton approach for stock options

Abstract

This paper aims at transferring the philosophy behind Heath-Jarrow-Morton to the modelling of call options with all strikes and maturities. Contrary to the approach by Carmona and Nadtochiy (2009) and related to the recent contribution Carmona and Nadtochiy (2012) by the same authors, the key parametrisation of our approach involves time-inhomogeneous L\'evy processes instead of local volatility models. We provide necessary and sufficient conditions for absence of arbitrage. Moreover we discuss the construction of arbitrage-free models. Specifically, we prove their existence and uniqueness given basic building blocks.