An accurate European option pricing model under Fractional Stable Process based on Feynman Path Integral

作者：Ma, Chao; Ma, Qinghua^*; Yao, Haixiang; Hou, Tiancheng

来源：Physica A: Statistical Mechanics and Its Applications , 2018, 494: 87-117.

DOI：10.1016/j.physa.2017.11.120

• European option pricing
• Fractional stable process
• Path integral
• Path dependent options

In this paper, we propose to use the Fractional Stable Process (FSP) for option pricing. The FSP is one of the few candidates to directly model a number of desired empirical properties of asset price risk neutral dynamics. However, pricing the vanilla European option under FSP is difficult and problematic. In the paper, built upon the developed Feynman Path Integral inspired techniques, we present a novel computational model for option pricing, i.e. the Fractional Stable Process Path Integral (FSPP1) model under a general fractional stable distribution that tackles this problem. Numerical and empirical experiments show that the proposed pricing model provides a correction of the Black-Scholes pricing error - overpricing long term options, underpricing short term options; overpricing out-of-the money options, underpricing in-the-money options without any additional structures such as stochastic volatility and a jump process.

• 出版日期2018-3-15
• 单位广东外语外贸大学