Cardiff University | Prifysgol Caerdydd ORCA
Online Research @ Cardiff 
WelshClear Cookie - decide language by browser settings

Option pricing in illiquid markets: a fractional jump-diffusion approach

Hainaut, Donatien and Leonenko, Mykola ORCID: https://orcid.org/0000-0003-1932-4091 2021. Option pricing in illiquid markets: a fractional jump-diffusion approach. Journal of Computational and Applied Mathematics 381 , 112995. 10.1016/j.cam.2020.112995

[thumbnail of dupireV11_REVIEW.pdf]
Preview
PDF - Accepted Post-Print Version
Available under License Creative Commons Attribution Non-commercial No Derivatives.

Download (419kB) | Preview

Abstract

We study the pricing of European options when the underlying stock price is illiquid. Due to the lack of trades, the sample path followed by prices alternates between active and motionless periods that are replicable by a fractional jump–diffusion. This process is obtained by changing the time-scale of a jump–diffusion with the inverse of a Lévy subordinator. We prove that option prices are solutions of a forward partial differential equation in which the derivative with respect to time is replaced by a Dzerbayshan–Caputo (D–C) derivative. The form of the D–C derivative depends upon the chosen inverted Lévy subordinator. We detail this for inverted stable and inverted Poisson subordinators. To conclude, we propose a numerical method to compute option prices for the two types of D–C derivatives.

Item Type: Article
Date Type: Publication
Status: Published
Schools: Mathematics
Publisher: Elsevier
ISSN: 0377-0427
Date of First Compliant Deposit: 20 May 2020
Date of Acceptance: 19 May 2020
Last Modified: 07 Nov 2023 05:13
URI: https://orca.cardiff.ac.uk/id/eprint/131834

Citation Data

Cited 4 times in Scopus. View in Scopus. Powered By Scopus® Data

Actions (repository staff only)

Edit Item Edit Item

Downloads

Downloads per month over past year

View more statistics