Abstract
This paper develops a European option pricing formula for fractional market models. Although there exist option pricing results for a fractional Black-Scholes model, they are established without accounting for stochastic volatility. In this paper, a fractional version of the Constant Elasticity of Variance (CEV) model is developed. European option pricing formula similar to that of the classical CEV model is obtained and a volatility skew pattern is revealed.
Information
Published: 1 January 2006
First available in Project Euclid: 28 November 2007
zbMATH: 1268.91177
MathSciNet: MR2427845
Digital Object Identifier: 10.1214/074921706000001012
Subjects:
Primary:
91B28
,
91B70
Secondary:
60H15
,
60H40
Keywords:
fractional Black-Scholes model
,
fractional Brownian motion
,
fractional constant elasticity of volatility model
,
fractional Ito's lemma
,
volatility skew
,
White noise
,
Wick calculus
Rights: Copyright © 2006, Institute of Mathematical Statistics
