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The Valuation Of European Option Under Subdiffusive Fractional Brownian Motion Of The Short Rate

Author

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  • FOAD SHOKROLLAHI

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

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.

Suggested Citation

  • Foad Shokrollahi, 2020. "The Valuation Of European Option Under Subdiffusive Fractional Brownian Motion Of The Short Rate," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 23(04), pages 1-16, June.
    • Handle: RePEc:wsi:ijtafx:v:23:y:2020:i:04:n:s0219024920500223
    DOI: 10.1142/S0219024920500223
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    Cited by:

    1. Dufera, Tamirat Temesgen, 2024. "Fractional Brownian motion in option pricing and dynamic delta hedging: Experimental simulations," The North American Journal of Economics and Finance, Elsevier, vol. 69(PB).

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