Publication details
The fractional and mixed-fractional CEV model
| Authors | |
|---|---|
| Year of publication | 2020 |
| Type | Article in Periodical |
| Magazine / Source | Journal of Computational and Applied Mathematics |
| Citation | |
| Doi | https://doi.org/10.1016/j.cam.2019.06.006 |
| Keywords | fBM; mfBm; CEV; Fractional Fokker-Planck; Fractional Ito's calculus; Feller's process |
| Description | The continuous observation of the financial markets has identified some 'stylized facts' which challenge the conventional assumptions, promoting the born of new approaches. On the one hand, the long-range dependence has been faced replacing the traditional Gauss-Wiener process (Brownian motion), characterized by stationary independent increments, by a fractional version. On the other hand, the CEV model addresses the Leverage effect and smile-skew phenomena, efficiently. In this paper, these two insights are merging and both the fractional and mixed-fractional extensions for the CEV model, are developed. Using the fractional versions of both the Ito's calculus and the Fokker-Planck equation, the transition probability density function of the asset price is obtained as the solution of a non-stationary Feller process with time-varying coefficients, getting an analytical valuation formula for a European Call option. Besides, the Greeks are computed and compared with the standard case. (C) 2019 Elsevier B.V. All rights reserved. |