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Calibration of the subdiffusive Black–Scholes model

Author

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  • Sebastian Orzel
  • Aleksander Weron

Abstract

In this paper we discuss subdiffusive mechanism for the description of some stock markets. We analyse the fractional Black–Scholes model in which the price of the underlying instrument evolves according to the subdiffusive geometric Brownian motion. We show how to efficiently estimate the parameters for the subdiffusive Black–Scholes formula i.e. parameter alpha responsible for distribution of length of constant stock prices periods and sigma — volatility parameter. A simple method how to price subdiffusive European call and put options by using Monte Carlo approach is presented.

Suggested Citation

  • Sebastian Orzel & Aleksander Weron, 2009. "Calibration of the subdiffusive Black–Scholes model," HSC Research Reports HSC/09/02, Hugo Steinhaus Center, Wroclaw University of Technology.
    • Handle: RePEc:wuu:wpaper:hsc0902
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    File URL: http://www.im.pwr.wroc.pl/~hugo/RePEc/wuu/wpaper/HSC_09_02.pdf
    File Function: Original version, 2009
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    References listed on IDEAS

    as
    1. Aleksander Janicki & Aleksander Weron, 1994. "Simulation and Chaotic Behavior of Alpha-stable Stochastic Processes," HSC Books, Hugo Steinhaus Center, Wroclaw University of Technology, number hsbook9401, December.
    2. Simon Hurst & Eckhard Platen & Svetlozar Rachev, 1997. "Subordinated Market Index Models: A Comparison," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 4(2), pages 97-124, May.
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    Cited by:

    1. Sebastian, Orzeł & Agnieszka, Wyłomańska, 2010. "Calibration of the subdiffusive arithmetic Brownian motion with tempered stable waiting-times," MPRA Paper 28593, University Library of Munich, Germany.
    2. Grzegorz Krzy.zanowski & Marcin Magdziarz & {L}ukasz P{l}ociniczak, 2019. "A weighted finite difference method for subdiffusive Black Scholes Model," Papers 1907.00297, arXiv.org, revised Apr 2020.

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    More about this item

    Keywords

    Black-Scholes model; option price; Monte Carlo simulation; fractional Fokker-Planck Equation; time-changed Brownian motion; martingale measure;
    All these keywords.

    JEL classification:

    • C46 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Specific Distributions
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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