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A multifractional option pricing formula

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ARANEDA Axel A.

Rok publikování 2024
Druh Článek v odborném periodiku
Fakulta / Pracoviště MU

Ekonomicko-správní fakulta

Citace
www https://www.worldscientific.com/doi/epdf/10.1142/S0219477524500603
Doi http://dx.doi.org/10.1142/S0219477524500603
Klíčová slova Multifractional Brownian motion; Hurst exponent; long-range dependence; European option pricing
Popis Fractional Brownian motion has become a standard tool to address long-range dependence in financial time series. However, a constant memory parameter is too restrictive to address different market conditions. Here, we model the price fluctuations using a multifractional Brownian motion assuming that the Hurst exponent is a time-deterministic function. Through the multifractional Ito calculus, both the related transition density function and the analytical European Call option pricing formula are obtained. The empirical performance of the multifractional Black-Scholes model is tested by calibration of option market quotes for the SPX index and offers best fit than its counterparts based on standard and fractional Brownian motions.

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