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    Fractional diffusion models of option prices in markets with jumps

    Cartea, Alvaro and del-Castillo-Negrete, D. (2006) Fractional diffusion models of option prices in markets with jumps. Working Paper. Birkbeck, University of London, London, UK.

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    Abstract

    Most of the recent literature dealing with the modeling of financial assets assumes that the underlying dynamics of equity prices follow a jump process or a L´evy process. This is done to incorporate rare or extreme events not captured by Gaussian models. Of those financial models proposed, the most interesting include the CGMY, KoBoL and FMLS. All of these capture some of the most important characteristics of the dynamics of stock prices. In this article we show that for these particular L´evy processes, the prices of financial derivatives, such as European-style options, satisfy a fractional partial differential equation (FPDE). As an application, we use numerical techniques to price exotic options, in particular barrier options, by solving the corresponding FPDEs derived.

    Metadata

    Item Type: Monograph (Working Paper)
    Additional Information: BWPEF 0604
    School: School of Business, Economics & Informatics > Economics, Mathematics and Statistics
    Depositing User: Administrator
    Date Deposited: 28 Mar 2019 07:06
    Last Modified: 13 Feb 2021 21:03
    URI: https://eprints.bbk.ac.uk/id/eprint/26938

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