Applications of the Fractional Diffusion Equation to Option Pricing and Risk Calculations

Result code in IS VaVaI
<a href="https://www.isvavai.cz/riv?ss=detail&h=RIV%2F68407700%3A21340%2F19%3A00334283" target="_blank" >RIV/68407700:21340/19:00334283 - isvavai.cz</a>
Result on the web
<a href="https://doi.org/10.3390/math7090796" target="_blank" >https://doi.org/10.3390/math7090796</a>
DOI - Digital Object Identifier
<a href="http://dx.doi.org/10.3390/math7090796" target="_blank" >10.3390/math7090796</a>

Result language
angličtina
Original language name
Applications of the Fractional Diffusion Equation to Option Pricing and Risk Calculations
Original language description
In this article, we first provide a survey of the exponential option pricing models and show that in the framework of the risk-neutral approach, they are governed by the space-fractional diffusion equation. Then, we introduce a more general class of models based on the space-time-fractional diffusion equation and recall some recent results in this field concerning the European option pricing and the risk-neutral parameter. We proceed with an extension of these results to the class of exotic options. In particular, we show that the call and put prices can be expressed in the form of simple power series in terms of the log-forward moneyness and the risk-neutral parameter. Finally, we provide the closed-form formulas for the first and second order risk sensitivities and study the dependencies of the portfolio hedging and profit-and-loss calculations upon the model parameters.
Czech name
—
Czech description
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Type
J<sub>imp</sub> - Article in a specialist periodical, which is included in the Web of Science database
CEP classification
—
OECD FORD branch
10102 - Applied mathematics

Project
<a href="/en/project/GA19-16066S" target="_blank" >GA19-16066S: Nonlinear interactions and information transfer in complex systems with extreme events</a><br>
Continuities
P - Projekt vyzkumu a vyvoje financovany z verejnych zdroju (s odkazem do CEP)

Publication year
2019
Confidentiality
S - Úplné a pravdivé údaje o projektu nepodléhají ochraně podle zvláštních právních předpisů

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