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Equity warrant pricing under subdiffusive fractional Brownian motion of the short rate

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  • Foad Shokrollahi
  • Marcin Marcin Magdziarz

Abstract

In this paper we propose an extension of the Merton model. We apply the subdiffusive mechanism to analyze equity warrant in a fractional Brownian motion environment, when the short rate follows the subdiffusive fractional Black-Scholes model. We obtain the pricing formula for zero-coupon bond in the introduced model and derive the partial differential equation with appropriate boundary conditions for the valuation of equity warrant. Finally, the pricing formula for equity warrant is provided under subdiffusive fractional Brownian motion model of the short rate.

Suggested Citation

  • Foad Shokrollahi & Marcin Marcin Magdziarz, 2020. "Equity warrant pricing under subdiffusive fractional Brownian motion of the short rate," Papers 2007.12228, arXiv.org, revised Nov 2020.
    • Handle: RePEc:arx:papers:2007.12228
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    References listed on IDEAS

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