Analytic properties of American option prices under a modified Black-Scholes equation with spatial fractional derivatives

DOI10.1016/J.PHYSA.2017.08.068MaRDI QIDQ2148591zbMATH OpenOpenAlexFDO

Authors Kai Du, Xinzi Qiu, Wen-Ting Chen

Publication date 24 June 2022

Published in Physica A (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1701.01515

zbMATH Keywords

American optionfractional partial differential equationconvexity of option pricesFMLS modelimpact of fat tails

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Fractional partial differential equations (35R11) Stopping times; optimal stopping problems; gambling theory (60G40)

Abstract: This paper investigates analytic properties of American option prices under the finite moment log-stable (FMLS) model. Under this model the price of American options is characterised by the free boundary problem of a fractional partial differential equation (FPDE) system. Using the technique of approximation we prove that the American put price under the FMLS model is convex with respect the underlying price, and specify the impact of the tail index on option prices.

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Cites work

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Cited in

(9)

• A new approach for pricing discounted American options
• Path-dependent game options with Asian features
• Perpetual game options with a multiplied penalty
• Analytically pricing European-style options under the modified Black-Scholes equation with a spatial-fractional derivative
• Novel approaches for getting the solution of the fractional Black-Scholes equation described by Mittag-Leffler fractional derivative
• PRICING AMERICAN OPTION USING A MODIFIED FRACTIONAL BLACK–SCHOLES MODEL UNDER MULTI-STATE REGIME SWITCHING
• The pre-history of econophysics and the history of economics: Boltzmann versus the marginalists
• scientific article; zbMATH DE number 7296044 (Why is no real title available?)
• A predictor-corrector approach for pricing American options under the finite moment log-stable model

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