A reliable treatment of residual power series method for time-fractional Black–Scholes European option pricing equations

Ved Prakash Dubey, Rajnesh Kumar and Devendra Kumar

Physica A: Statistical Mechanics and its Applications, 2019, vol. 533, issue C

Abstract: Approximate analytical solution of a fractional Black–Scholes pricing model is much relevant due to its practical importance to financial markets. In this article, a powerful approximate iterative mathematical scheme based on residual power series (RPS) algorithm is presented to achieve the numerical results of the nonlinear time fractional Black–Scholes (BS) equations based on European options. The Caputo-type fractional derivatives are considered in the present article. The residual power series method (RPSM) developed by Arqub (2013) is the novel technique for finding the analytical Taylor series solutions of systems of linear and nonlinear ODEs and PDEs. The residual power series technique supplies the approximate analytical solutions of the problem in truncated series form using residual error concept along with given initial conditions. The numerical procedures reveal that only a few iterations are sufficient for better approximations of the solutions, which clearly exhibits the reliability and effectiveness of this iterative scheme. This article shows that the adopted scheme is quite systematic as well as computationally attractive regarding solution procedure. In addition, effects of fractional order of time derivatives on the solutions for various particular cases are also depicted through graphs.

Keywords: Residual power series method; Power series solution; Residual error; Fractional Black–Scholes equation; Option pricing (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:533:y:2019:i:c:s037843711931177x

DOI: 10.1016/j.physa.2019.122040

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