 Fractional Brownian motion in option pricing and dynamic delta hedging: Experimental simulationsTamirat Temesgen Dufera The North American Journal of Economics and Finance, 2024, vol. 69, issue PB Abstract: This research examines the impact of fractional Brownian motion (fBm) on option pricing and dynamic delta hedging. Through experimental simulations, we analyze the influence of the Hurst exponent on option price prediction. Our findings highlight the necessity for continuous calibration of the Hurst exponent for a specific market dataset. By estimating option prices using fBm, we evaluate price prediction accuracy and explore fBm’s benefits in option pricing models. We also investigate dynamic delta hedging strategies for call options within the fBm framework, providing an algorithm and code that consider the Hurst exponent. The study’s insights contribute to advancing financial modeling and risk management practices, illuminating the dynamic nature of market phenomena and underscoring calibration’s significance in capturing market dynamics. The findings emphasize the dynamic interplay between the Hurst exponent and option pricing, offering valuable implications for effective risk management strategies. Keywords: European options; Fractional Brownian motion; Black–Scholes–Merton model; Dynamic delta hedging; Hurst exponent; Simulation (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:69:y:2024:i:pb:s1062940823001407 DOI: 10.1016/j.najef.2023.102017 Access Statistics for this article The North American Journal of Economics and Finance is currently edited by Hamid Beladi More articles in The North American Journal of Economics and Finance from Elsevier |
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