Innovative Extensions to Option Pricing: Asymmetric Brownian Motion and Random Walk Approaches

Jagdish Gnawali, Abootaleb Shirvani, Dilmi C. W. Hettiachchi-Halpe-Kankanamalage, W. Brent Lindquist, Svetlozar T. Rachev and Frank J. Fabozzi

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Abstract: Classical option pricing models, such as Bachelier and Black--Scholes--Merton, postulate symmetric Brownian diffusion, which limits their capacity to reflect empirical phenomena including return skewness, heavy tails, and volatility asymmetry. This paper develops an innovative extension: the Geometric Asymmetric Brownian Motion (GABM), unifying asymmetric Brownian motion and random walk methodologies within the Bachelier--Black--Scholes--Merton framework. The approach harnesses the Cherny--Shiryaev--Yor invariance principle (CSYIP) to define asymmetric random walk integrals, where local time at the origin generates skewness and state-dependent risk. Closed-form option pricing formulas are derived, and a discrete-time binomial tree algorithm is constructed and shown to converge rigorously to the GABM limit. By incorporating a smoothed functional form based on the normal inverse Gaussian distribution, the model allows for flexible, state-dependent volatility calibration. Numerical experiments demonstrate the resulting option price and implied volatility surfaces, highlighting the framework's enhanced ability to capture persistent market asymmetry and complex risk behaviors observed in empirical data.

Date: 2026-06
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