The fractional and mixed-fractional CEV model

Axel A. Araneda

Papers from arXiv.org

Abstract: The continuous observation of the financial markets has identified some stylized facts which challenge the conventional assumptions, promoting the born of new approaches. On the one hand, the long-range dependence has been faced replacing the traditional Gauss-Wiener process (Brownian motion), characterized by stationary independent increments, by a fractional version. On the other hand, the CEV model addresses the Leverage effect and smile-skew phenomena, efficiently. In this paper, these two insights are merging and both the fractional and mixed-fractional extensions for the CEV model, are developed. Using the fractional versions of both the Ito's calculus and the Fokker-Planck equation, the transition probability density function of the asset price is obtained as the solution of a non-stationary Feller process with time-varying coefficients, getting an analytical valuation formula for a European Call option. Besides, the Greeks are computed and compared with the standard case.

Date: 2019-03, Revised 2019-06
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Published in Journal of computational and applied mathematics, 2019

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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1903.05747

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