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

DOI10.1016/J.PHYSA.2017.08.068zbMATH Open1493.91124arXiv1701.01515OpenAlexW2571695482MaRDI QIDQ2148591FDOQ2148591

Wen-Ting Chen, Kai Du, Xinzi Qiu

Publication date: 24 June 2022

Published in: Physica A (Search for Journal in Brave)

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.

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

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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)

Cites Work

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• Analytically pricing European-style options under the modified Black-Scholes equation with a spatial-fractional derivative
• A predictor-corrector approach for pricing American options under the finite moment log-stable model

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• Novel approaches for getting the solution of the fractional Black-Scholes equation described by Mittag-Leffler fractional derivative
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• Title not available (Why is that?)
• The pre-history of econophysics and the history of economics: Boltzmann versus the marginalists

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