The Approximate Analytic Solution of the Time-Fractional Black-Scholes Equation with a European Option Based on the Katugampola Fractional Derivative

Sivaporn Ampun and Panumart Sawangtong
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Sivaporn Ampun: Department of Mathematics, Faculty of Applied Science, King Mongkut’s University of Technology North Bangkok, Pracharat 1 Road, Bangkok 10800, Thailand
Panumart Sawangtong: Department of Mathematics, Faculty of Applied Science, King Mongkut’s University of Technology North Bangkok, Pracharat 1 Road, Bangkok 10800, Thailand

Mathematics, 2021, vol. 9, issue 3, 1-15

Abstract: In the finance market, it is well known that the price change of the underlying fractal transmission system can be modeled with the Black-Scholes equation. This article deals with finding the approximate analytic solutions for the time-fractional Black-Scholes equation with the fractional integral boundary condition for a European option pricing problem in the Katugampola fractional derivative sense. It is well known that the Katugampola fractional derivative generalizes both the Riemann–Liouville fractional derivative and the Hadamard fractional derivative. The technique used to find the approximate analytic solutions of the time-fractional Black-Scholes equation is the generalized Laplace homotopy perturbation method, the combination of the generalized Laplace transform and homotopy perturbation method. The approximate analytic solution for the problem is in the form of the generalized Mittag-Leffler function. This shows that the generalized Laplace homotopy perturbation method is one of the most effective methods to construct approximate analytic solutions of the fractional differential equations. Finally, the approximate analytic solutions of the Riemann–Liouville and Hadamard fractional Black-Scholes equation with the European option are also shown.

Keywords: fractional Black-Scholes equation; homotopy perturbation method; generalized fractional derivative; generalized Laplace transform; generalized Mittag-Leffler function (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 (1)

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