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Option pricing with fractional volatility

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  • Rui Vilela Mendes
  • Maria Joao Oliveira

Abstract

Based on empirical market data, a stochastic volatility model is proposed with volatility driven by fractional noise. The model is used to obtain a risk-neutrality option pricing formula and an option pricing equation.

Suggested Citation

  • Rui Vilela Mendes & Maria Joao Oliveira, 2004. "Option pricing with fractional volatility," Papers cond-mat/0404684, arXiv.org.
    • Handle: RePEc:arx:papers:cond-mat/0404684
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    References listed on IDEAS

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    1. Ding, Zhuanxin & Granger, Clive W. J., 1996. "Modeling volatility persistence of speculative returns: A new approach," Journal of Econometrics, Elsevier, vol. 73(1), pages 185-215, July.
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