LONG MEMORY STOCHASTIC VOLATILITY IN OPTION PRICING

DOI10.1142/S0219024905003013zbMATH Open1113.91022arXivcond-mat/0403761MaRDI QIDQ3023923FDOQ3023923

Sergei Fedotov, Abby Tan

Publication date: 6 July 2005

Published in: International Journal of Theoretical and Applied Finance (Search for Journal in Brave)

Abstract: The aim of this paper is to present a simple stochastic model that accounts for the effects of a long-memory in volatility on option pricing. The starting point is the stochastic Black-Scholes equation involving volatility with long-range dependence. We consider the option price as a sum of classical Black-Scholes price and random deviation describing the risk from the random volatility. By using the fact the option price and random volatility change on different time scales, we find the asymptotic equation for the derivation involving fractional Brownian motion. The solution to this equation allows us to find the pricing bands for options.

Full work available at URL: https://arxiv.org/abs/cond-mat/0403761

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zbMATH Keywords

option pricinglong memorystochastic volatility

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Stochastic models in economics (91B70)

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Cited In (5)

• A fractional version of the Merton model.
• Stochastic volatility and option pricing with long-memory in discrete and continuous time
• CEV model equipped with the long-memory
• Estimation and pricing under long-memory stochastic volatility
• Long memory in continuous-time stochastic volatility models

Uses Software

• longmemo

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