Solution of integrals with fractional Brownian motion for different Hurst indices

Fei Gao, Shuaiqiang Liu, Cornelis Oosterlee and Nico M. Temme

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Abstract: In this paper, we will evaluate integrals that define the conditional expectation, variance and characteristic function of stochastic processes with respect to fractional Brownian motion (fBm) for all relevant Hurst indices, i.e. $H \in (0,1)$. The fractional Ornstein-Uhlenbeck (fOU) process, for example, gives rise to highly nontrivial integration formulas that need careful analysis when considering the whole range of Hurst indices. We will show that the classical technique of analytic continuation, from complex analysis, provides a way of extending the domain of validity of an integral, from $H\in(1/2,1)$, to the larger domain, $H\in(0,1)$. Numerical experiments for different Hurst indices confirm the robustness and efficiency of the integral formulations presented here. Moreover, we provide accurate and highly efficient financial option pricing results for processes that are related to the fOU process, with the help of Fourier cosine expansions.

Date: 2022-03, Revised 2022-03
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