Efficient valuation and exercise boundary of American fractional lookback option in a mixed jump-diffusion model

Zhaoqiang Yang
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Zhaoqiang Yang: Classic Library Reference Room, P. R. China2Lanzhou University of Finance and Economics, Lanzhou Gansu, P. R. China

International Journal of Financial Engineering (IJFE), 2017, vol. 04, issue 02n03, 1-29

Abstract: This study presents an efficient method for pricing the American fractional lookback option in the case where the stock price follows a mixed jump diffusion fraction Brownian motion. By using Itô formula and Wick–Itô–Skorohod integral, a new market pricing model is built. The fundamental solutions of stochastic parabolic partial differential equations are estimated under the condition of Merton assumptions. The explicit integral representation of early exercise premium and the critical exercise price are also given. Numerical simulation illustrates some notable features of American fractional lookback options.

Keywords: Mixed jump-diffusion fractional Brownian motion; Wick–Itô–Skorohod integral; fundamental solutions; optimal exercise boundary (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1142/S2424786317500335

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