THE VALUATION OF EUROPEAN OPTION UNDER SUBDIFFUSIVE FRACTIONAL BROWNIAN MOTION OF THE SHORT RATE

Foad Shokrollahi ()
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Foad Shokrollahi: Department of Mathematics and Statistics, University of Vaasa, P. O. Box 700, Vaasa FIN-65101, Finland

International Journal of Theoretical and Applied Finance (IJTAF), 2020, vol. 23, issue 04, 1-16

Abstract: In this paper, we propose an extension of the Merton model. We apply the subdiffusive mechanism to analyze European option in a fractional Black–Scholes environment, when the short rate follows the subdiffusive fractional Black–Scholes model. We derive a pricing formula for call and put options and discuss the corresponding fractional Black–Scholes equation. We present some features of our model pricing model for the cases of α and H.

Keywords: Merton short rate model; subdiffusive processes; fractional Brownian motion; option pricing (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:wsi:ijtafx:v:23:y:2020:i:04:n:s0219024920500223

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DOI: 10.1142/S0219024920500223

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