A fractional version of the Merton model. (Q1419131)
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English | A fractional version of the Merton model. |
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A fractional version of the Merton model. (English)
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14 January 2004
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In this paper, the impact of long-range dependence on the option pricing is investigated. The authors consider the option pricing problem while the dynamics of stock log-price follow a fractional jump-diffusion process with Hurst exponent \(H>1/2\). So, the sample paths of log-prices of the stocks exhibit long-range dependence and look as if they are fractional Brownian motions, although occasional jumps will be noticeable. The price of a European call option is derived. It does not contain explicitly the volatility, therefore the call premiums are ``smaller'' than those of the Merton's call. Finally, the relation between Hurst exponent and long-range dependence is discussed.
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option pricing
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long-range dependence
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