Block-pulse operational matrix method for solving fractional Black-Scholes equation

Farshid Mehrdoust, Amir Hosein Refahi Sheikhani, Mohammad Mashoof and Sabahat Hasanzadeh

Journal of Economic Studies, 2017, vol. 44, issue 3, 489-502

Abstract: Purpose - The purpose of this paper is to evaluate a European option using the fractional version of the Black-Scholes model. Design/methodology/approach - In this paper, the authors employ the block-pulse operational matrix algorithm to approximate the solution of the fractional Black-Scholes equation with the initial condition for a European option pricing problem. Findings - The fractional derivative will be described in the Caputo sense in this paper. The authors show the accuracy and computational efficiency of the proposed algorithm through some numerical examples. Originality/value - This is the first paper that considers an alternative algorithm for pricing a European option using the fractional Black-Scholes model.

Keywords: Block-pulse operational matrix method; Black Scholes model; European option pricing problem; Fractional Black-Scholes equation; 65C05; 35P15; q34L16 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eme:jespps:jes-05-2016-0107

DOI: 10.1108/JES-05-2016-0107

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