Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
7376117 | Physica A: Statistical Mechanics and its Applications | 2018 | 35 Pages |
Abstract
In this paper, we propose to use the Fractional Stable Process (FSP) for option pricing. The FSP is one of the few candidates to directly model a number of desired empirical properties of asset price risk neutral dynamics. However, pricing the vanilla European option under FSP is difficult and problematic. In the paper, built upon the developed Feynman Path Integral inspired techniques, we present a novel computational model for option pricing, i.e. the Fractional Stable Process Path Integral (FSPPI) model under a general fractional stable distribution that tackles this problem. Numerical and empirical experiments show that the proposed pricing model provides a correction of the Black-Scholes pricing error - overpricing long term options, underpricing short term options; overpricing out-of-the-money options, underpricing in-the-money options without any additional structures such as stochastic volatility and a jump process.
Keywords
Related Topics
Physical Sciences and Engineering
Mathematics
Mathematical Physics
Authors
Chao Ma, Qinghua Ma, Haixiang Yao, Tiancheng Hou,