Option Pricing under Double Heston Jump-Diffusion Model with Approximative Fractional Stochastic Volatility

Ying Chang, Yiming Wang and Sumei Zhang
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Ying Chang: School of Economics, Peking University, Beijing 100871, China
Yiming Wang: School of Economics, Peking University, Beijing 100871, China
Sumei Zhang: School of Science, Xi’an University of Posts and Telecommunications, Xi’an 710121, China

Mathematics, 2021, vol. 9, issue 2, 1-10

Abstract: Based on the present studies about the application of approximative fractional Brownian motion in the European option pricing models, our goal in the article is that we adopt the creative model by adding approximative fractional stochastic volatility to double Heston model with jumps since approximative fractional Brownian motion is more proper for application than Brownian motion in building option pricing models based on financial market data. We are the first to adopt the creative model. We derive the pricing formula for the options and the formula for the characteristic function. We also estimate the parameters with the loss function for the model and two nested models and compare the performance among those models based on the market data. The outcome illustrates that the model offers the best performance among the three models. It demonstrates that approximative fractional Brownian motion is more proper for application than Brownian motion.

Keywords: option pricing; double heston model; Jump-diffusion model; approximative fractional Brownian motion; calibration (search for similar items in EconPapers)
JEL-codes: C (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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