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Fractional processes as models in stochastic finance


  • Christian Bender
  • Tommi Sottinen
  • Esko Valkeila


We survey some new progress on the pricing models driven by fractional Brownian motion \cb{or} mixed fractional Brownian motion. In particular, we give results on arbitrage opportunities, hedging, and option pricing in these models. We summarize some recent results on fractional Black & Scholes pricing model with transaction costs. We end the paper by giving some approximation results and indicating some open problems related to the paper.

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  • Christian Bender & Tommi Sottinen & Esko Valkeila, 2010. "Fractional processes as models in stochastic finance," Papers 1004.3106,
  • Handle: RePEc:arx:papers:1004.3106

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    References listed on IDEAS

    1. Sottinen Tommi & Valkeila Esko, 2003. "On arbitrage and replication in the fractional Black–Scholes pricing model," Statistics & Risk Modeling, De Gruyter, vol. 21(2/2003), pages 93-108, February.
    2. Paolo Guasoni & Miklós Rásonyi & Walter Schachermayer, 2010. "The fundamental theorem of asset pricing for continuous processes under small transaction costs," Annals of Finance, Springer, vol. 6(2), pages 157-191, March.
    3. Erhan Bayraktar & Ulrich Horst & Ronnie Sircar, 2006. "A Limit Theorem for Financial Markets with Inert Investors," Mathematics of Operations Research, INFORMS, vol. 31(4), pages 789-810, November.
    4. Tomas Björk & Henrik Hult, 2005. "A note on Wick products and the fractional Black-Scholes model," Finance and Stochastics, Springer, vol. 9(2), pages 197-209, April.
    5. Tommi Sottinen, 2001. "Fractional Brownian motion, random walks and binary market models," Finance and Stochastics, Springer, vol. 5(3), pages 343-355.
    6. Paolo Guasoni & Mikl'os R'asonyi & Walter Schachermayer, 2008. "Consistent price systems and face-lifting pricing under transaction costs," Papers 0803.4416,
    7. Christian Bender & Tommi Sottinen & Esko Valkeila, 2008. "Pricing by hedging and no-arbitrage beyond semimartingales," Finance and Stochastics, Springer, vol. 12(4), pages 441-468, October.
    8. L. C. G. Rogers, 1997. "Arbitrage with Fractional Brownian Motion," Mathematical Finance, Wiley Blackwell, vol. 7(1), pages 95-105.
    9. Jouini Elyes & Kallal Hedi, 1995. "Martingales and Arbitrage in Securities Markets with Transaction Costs," Journal of Economic Theory, Elsevier, vol. 66(1), pages 178-197, June.
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    Cited by:

    1. Stoyan V. Stoyanov & Svetlozar T. Rachev & Stefan Mittnik & Frank J. Fabozzi, 2017. "Pricing derivatives in Hermite markets," Papers 1709.09068,
    2. Alexander Alvarez & Sebastian E. Ferrando, 2016. "Trajectory-Based Models, Arbitrage And Continuity," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 19(03), pages 1-34, May.
    3. Jos'e Igor Morlanes, 2017. "Mixed Models as an Alternative to Farima," Papers 1712.03044,
    4. Takaki Hayashi & Yuta Koike, 2017. "No arbitrage and lead-lag relationships," Papers 1712.09854,
    5. Mishura, Yuliya & Shevchenko, Georgiy & Valkeila, Esko, 2013. "Random variables as pathwise integrals with respect to fractional Brownian motion," Stochastic Processes and their Applications, Elsevier, vol. 123(6), pages 2353-2369.
    6. Fernando Cordero & Lavinia Perez-Ostafe, 2014. "Critical transaction costs and 1-step asymptotic arbitrage in fractional binary markets," Papers 1407.8068,
    7. Hasanjan Sayit, 2013. "Absence of arbitrage in a general framework," Annals of Finance, Springer, vol. 9(4), pages 611-624, November.
    8. Ehsan Azmoodeh, 2010. "On the fractional Black-Scholes market with transaction costs," Papers 1005.0211,
    9. Foad Shokrollahi & Tommi Sottinen, 2017. "Hedging in fractional Black-Scholes model with transaction costs," Papers 1706.01534,, revised Jul 2017.
    10. Alexander Schied, 2013. "Model-free CPPI," Papers 1305.5915,, revised Jan 2014.
    11. Nikolai Dokuchaev, 2015. "On the no-arbitrage market and continuity in the Hurst parameter," Papers 1509.06472,, revised Oct 2015.
    12. Benjamín Vallejo Jiménez & Francisco Venegas Martínez, 2017. "Optimal consumption and portfolio rules when the asset price is driven by a time-inhomogeneous Markov modulated fractional Brownian motion with," Economics Bulletin, AccessEcon, vol. 37(1), pages 314-326.
    13. Sebastian E. Ferrando & Alfredo L. Gonzalez & Ivan L. Degano & Massoome Rahsepar, 2014. "Discrete, Non Probabilistic Market Models. Arbitrage and Pricing Intervals," Papers 1407.1769,, revised Nov 2015.
    14. Christian Bender, 2012. "Simple arbitrage," Papers 1210.5391,

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