Pricing of financial derivatives based on the Tsallis statistical theory

Pan Zhao, Jian Pan, Qin Yue and Jinbo Zhang

Chaos, Solitons & Fractals, 2021, vol. 142, issue C

Abstract: Asset return distributions usually have peaks, fat tails and skewed tails, because of the impact of extreme events outside financial markets. The Tsallis distribution has the peak and fat-tail characteristic, and the asymmetric jump process can fit the skewed tail of returns. Therefore, to accurately describe asset returns, we propose a price model by the use of the Tsallis distribution and a Poisson jump process, which can characterize the long-term memory and the skewness of asset returns. Moreover, using the stochastic differential theory and the martingale method, we obtain an explicit solution for pricing European options.

Keywords: Financial derivatives; Pricing; Tsallis statistics; Jump process; Martingale method (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:chsofr:v:142:y:2021:i:c:s0960077920308559

DOI: 10.1016/j.chaos.2020.110463

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