The numerical solution of fractional Black-Scholes-Schrödinger equation using the RBFs method (Q2246515)

An option is one of the most important and popular financial derivative in finance market. There are various types of mathematical models for option pricing. The Black-Scholes equation provides an approximate description of underlying asset price behaviour becomes popular in various kinds of studies such as economics, physics and financial mathematics. The Black-Scholes equation is a well-known financial model in option pricing which is constructed under strict assumptions. In the present paper the radial basis functions (RBFs) method is used to solve a fractional Black-Scholes-Schrödinger equation in an option pricing of financial problems. The RBFs method is applied in discretizing a spatial derivative process. This RBFs approach was theoretically proved with different problems of two numerical examples: time step arbitrage bubble case and time linear arbitrage bubble case. The obtained numerical results are compared with the semantical solution in case of financial order close to 1. As a result the both numerical examples show that the option prices from RBFs method satisfy the semiclassical solution. In the Introduction of the paper it is discussed that the Black-Scholes-Schrödinger equation can be used to describe the analysis of option pricing in financial markets. Also the applications of the fractional differential equations as a tool to describe the phenomena in applied sciences and engineering are considered. \par In Section 2 the basic concept of the Black-Scholes-Schrödinger equation is briefly described. Two partial cases of the Black-Scholes-Schrödinger equation are presented and discussed. The fractional Black-Scholes-Schrödinger equation in the domain \((x,t)\) is expressed. In Section 3 the spatial discretization of the fractional Black-Scholes-Schrödinger equation is analysed by using the RBFs method. First the RBFs interpolation formulation is presented. From this discretization of the fractional Black-Scholes-Schrödinger equation a system of ordinary differential equations is obtained. In Section 4 the systems of ordinary differential equations from previous section are discretized on time variable by a simple quadrature formula. Here the time fractional derivative is defined by Caputo's view-point of order \(\alpha\) \((0 < \alpha \leq 1).\) \par In Section 5 the stability of the RBFs method is considered. Section 6 consists a time step arbitrage bubble and time linear arbitrage bubble cases. The both cases are represented for confirming the accuracy of the proposed numerical method. The solution of the fractional Black-Scholes-Schrödinger equation is verified by comparing with the semiclassical solution. It is shown haw to calculate the semiclassical solution in the presence of a time-depended arbitrage bubble. Two examples are considered. In the both examples the time step arbitrage bubble cases are explained. The corresponding solutions are discussed. In Section 7 a short comments about the numerical method in solving the fractional Black-Scholes-Schrödinger equation based on RBFs method are given. The spatial derivative and its discretization by the RBFs method, a simple quadrature formula, the selection og the Gaussian function and the numerical solutions of the fractional Black-Scholes-Schrödinger equation are discussed.