Equity-linked securities option pricing by fractional Brownian motion

Jian Wang, Yan Yan, Wenbing Chen, Wei Shao, Jian Wang and Weiwei Tang

Chaos, Solitons & Fractals, 2021, vol. 144, issue C

Abstract: In this paper, we use the Monte Carlo simulation (MCS) method to price the Equity-Linked Securities (ELS) option by fractional Brownian motion (fBm). We use the fBm that satisfy the Itô process instead of the geometric Brownian motion, and we call the proposed model ELS-fBm model. We first do the convergence test with the number of MCS. Then, we price the one-, two-, and three-asset ELS by employing the classical ELS model and the ELS-fBm model, respectively. We see that the price of ELS varies with different Hurst exponent, which indicates that the ELS pricing model considering the long-range dependence is necessary and more suitable for the financial market under uncertain environment. In addition, we prove the superiority of our proposed model with an actual three-assets ELS product which is issued by Future Asset company. We find the ELS price calculated by the proposed ELS-fBm model almost the same as the ELS price in the ELS product contract issued by Future Asset company, while the classical ELS model produces a great deviation.

Keywords: ELS; fBm; MCS; Hurst exponent (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0960077921000692
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:chsofr:v:144:y:2021:i:c:s0960077921000692

DOI: 10.1016/j.chaos.2021.110716

Access Statistics for this article

Chaos, Solitons & Fractals is currently edited by Stefano Boccaletti and Stelios Bekiros

More articles in Chaos, Solitons & Fractals from Elsevier
Bibliographic data for series maintained by Thayer, Thomas R. ().