Continuous time Black-Scholes equation with transaction costs in subdiffusive fractional Brownian motion regime

In this paper, we study the problem of continuous time option pricing with transaction costs by using the homogeneous subdiffusive fractional Brownian motion (HFBM) Z(t)=X(S_α(t)), 0<α<1, here dX(τ)=μX(τ)(dτ)^2H+σX(τ)dB_H(τ), as a model of asset prices, which captures the subdiffusive characteristic of financial markets. We find the corresponding subdiffusive Black-Scholes equation and the Black-Scholes formula for the fair prices of European option, the turnover and transaction costs of replicating strategies. We also give the total transaction costs.     

Time-changed geometric fractional Brownian motion and option pricing with transaction costs

This paper deals with the problem of discrete time option pricing by a fractional subdiffusive Black–Scholes model. The price of the underlying stock follows a time-changed geometric fractional Brownian motion. By a mean self-financing delta-hedging argument, the pricing formula for the European call option in discrete time setting is obtained.     

分数阶质量涨落谐振子的共振行为

针对黏性介质引起的Brown粒子质量存在随机涨落以及阻尼力对历史速度具有记忆性等问题, 本文首次提出分数阶质量涨落谐振子模型, 以考察黏性介质中Brown粒子的动力学特性. 首先, 将Shapiro-Loginov 公式分数阶化, 使之适用于对含指数关联随机系数的分数阶随机微分方程的求解. 然后, 利用随机平均法和分数阶Shapiro-Loginov公式推导系统稳态响应振幅的解析表达式, 并据此研究系统的共振行为; 最后, 通过仿真实验验证理论结果的可靠性. 研究表明: 1)质量涨落噪声可诱导系统产生随机共振行为; 2)记忆性阻尼力可诱导系统产生参数诱导共振行为; 3)不同参数条件下, 系统表现出单峰共振、双峰共振等多样化的共振形式. 关键词： 黏性介质 质量涨落 阻尼记忆性 分数阶谐振子     

On the relation between the fractional Brownian motion and the fractional derivatives

The definition and simulation of fractional Brownian motion are considered from the point of view of a set of coherent fractional derivative definitions. To do it, two sets of fractional derivatives are considered: (a) the forward and backward and (b) the central derivatives, together with two representations: generalised difference and integral. It is shown that for these derivatives the corresponding autocorrelation functions have the same representations. The obtained results are used to define a fractional noise and, from it, the fractional Brownian motion. This is studied. The simulation problem is also considered.     

Higher-order stochastic averaging to study stability of a fractional viscoelastic column

Stochastic stability of a fractional viscoelastic column axially loaded by a wideband random force is investigated by using the method of higher-order stochastic averaging. By modelling the wideband random excitation as Gaussian white noise and real noise and assuming the viscoelastic material to follow the fractional Kelvin–Voigt constitutive relation, the motion of the column is governed by a fractional stochastic differential equation, which is justifiably and uniformly approximated by an averaged system of Itô stochastic differential equations. Analytical expressions are obtained for the moment Lyapunov exponent and the Lyapunov exponent of the fractional system with small damping and weak random fluctuation. The effects of various parameters on the stochastic stability of the system are discussed.     

Black-Scholes Formula in Subdiffusive Regime

In the classical approach the price of an asset is described by the celebrated Black-Scholes model. In this paper we consider a generalization of this model, which captures the subdiffusive characteristics of financial markets. We introduce a subdiffusive geometric Brownian motion as a model of asset prices exhibiting subdiffusive dynamics. We find the corresponding fractional Fokker-Planck equation governing the dynamics of the probability density function of the introduced process. We prove that the considered model is arbitrage-free and incomplete. We find the corresponding subdiffusive Black-Scholes formula for the fair prices of European options and show how these prices can be evaluated using Monte-Carlo methods. We compare the obtained results with the classical ones.     

Finite difference approximations for a fractional advection diffusion problem

The use of the conventional advection diffusion equation in many physical situations has been questioned by many investigators in recent years and alternative diffusion models have been proposed. Fractional space derivatives are used to model anomalous diffusion or dispersion, where a particle plume spreads at a rate inconsistent with the classical Brownian motion model. When a fractional derivative replaces the second derivative in a diffusion or dispersion model, it leads to enhanced diffusion, also called superdiffusion. We consider a one-dimensional advection–diffusion model, where the usual second-order derivative gives place to a fractional derivative of order α$\alpha$, with 1<α?2$1<\alpha ?2$. We derive explicit finite difference schemes which can be seen as generalizations of already existing schemes in the literature for the advection–diffusion equation. We present the order of accuracy of the schemes and in order to show its convergence we prove they are stable under certain conditions. In the end we present a test problem.     

Comment on “Time-changed geometric fractional Brownian motion and option pricing with transaction costs” by Hui Gu et al.

The purpose of this comment is to point out the inappropriate assumption of “3αH>1$3\alpha H>1$” and two problems in the proof of “Theorem 3.1” in section 3 of the paper “Time-changed geometric fractional Brownian motion and option pricing with transaction costs” by Hui Gu et al. [H. Gu, J.R. Liang, Y. X. Zhang, Time-changed geometric fractional Brownian motion and option pricing with transaction costs, Physica A 391 (2012) 3971–3977]. Then we show the two problems will be solved under our new assumption.     

Propagation characteristics of elegant Laguerre-Gaussian beams in the fractional Hankel transform plane

The fractional Hankel transform (FRHT) system is applied to study the transformation properties of elegant Laguerre-Gaussian beams (ELGBs). An analytical formula is derived for the FRHT of ELGBs based on the definition of the FRHB. By using the derived formula and the definition of the kurtosis parameter, the analytical propagation expression for the kurtosis parameter of ELGBs in the FRHT plane is derived. Some detailed numerical examples are given to illustrate the analytical results. The results show that the intensity distribution and the kurtosis parameter of elegant Laguerre-Gaussian beams in the fractional Hankel transform plane not only depend on order p and index m of Laguerre polynomial, but also evolve periodically with fractional order p of fractional system.     

Horizontal visibility graphs transformed from fractional Brownian motions: Topological properties versus the Hurst index

Nonlinear time series analysis aims at understanding the dynamics of stochastic or chaotic processes. In recent years, quite a few methods have been proposed to transform a single time series to a complex network so that the dynamics of the process can be understood by investigating the topological properties of the network. We study the topological properties of horizontal visibility graphs constructed from fractional Brownian motions with different Hurst indexes H∈(0,1). Special attention has been paid to the impact of the Hurst index on topological properties. It is found that the clustering coefficient C decreases when H increases. We also found that the mean length L of the shortest paths increases exponentially with H for fixed length N of the original time series. In addition, L increases linearly with respect to N when H is close to 1 and in a logarithmic form when H is close to 0. Although the occurrence of different motifs changes with H, the motif rank pattern remains unchanged for different H. Adopting the node-covering box-counting method, the horizontal visibility graphs are found to be fractals and the fractal dimension d_B decreases with H. Furthermore, the Pearson coefficients of the networks are positive and the degree-degree correlations increase with degree, which indicate that the horizontal visibility graphs are assortative. With the increase of H, the Pearson coefficient decreases first and then increases, in which the turning point is around H=0.6. The presence of both fractality and assortativity in the horizontal visibility graphs converted from fractional Brownian motions is different from many cases where fractal networks are usually disassortative.     

Fractional Fokker-Planck Equation and Black-Scholes Formula in Composite-Diffusive Regime

In statistical physics, anomalous diffusion plays an important role, whose applications have been found in many areas. In this paper, we introduce a composite-diffusive fractional Brownian motion X _α,H (t)=X _H (S _α (t)), 0<α,H<1, driven by anomalous diffusions as a model of asset prices and discuss the corresponding fractional Fokker-Planck equation and Black-Scholes formula. We obtain the fractional Fokker-Planck equation governing the dynamics of the probability density function of the composite-diffusive fractional Brownian motion and find the Black-Scholes differential equation driven by the stock asset X _α,H (t) and the corresponding Black-Scholes formula for the fair prices of European option.     

The time fractional heat conduction equation in the general orthogonal curvilinear coordinate and the cylindrical coordinate systems

In this paper a time fractional Fourier law is obtained from fractional calculus. According to the fractional Fourier law, a fractional heat conduction equation with a time fractional derivative in the general orthogonal curvilinear coordinate system is built. The fractional heat conduction equations in other orthogonal coordinate systems are readily obtainable as special cases. In addition, we obtain the solution of the fractional heat conduction equation in the cylindrical coordinate system in terms of the generalized H-function using integral transformation methods. The fractional heat conduction equation in the case 0<α≤1 interpolates the standard heat conduction equation (α=1) and the Localized heat conduction equation (α→0). Finally, numerical results are presented graphically for various values of order of fractional derivative.     

Relationships between power-law long-range interactions and fractional mechanics

We investigate the relationships between models of power-law long-range interactions and mechanics based on fractional derivatives. We present the fractional Lagrangian density which gives the Euler–Lagrange equation that serves as the equation of motion for fractional-power-law long-range interactions. We derive this equation by the fractional variational method. In addition, we derive a Noether-like current from the fractional Lagrangian density.     

Fokker-Planck Type Equations Associated with Subordinated Processes Controlled by Tempered α-stable Processes

In this paper we introduce two models of stochastic processes driven by Brownian motion and fractional Brownian motion subordinated with tempered α-stable waiting times. By using a new integro-differential operator we obtain the generalized Fokker-Planck type equations associated with these subordinated stochastic processes.     

The valuation of equity warrants in a fractional Brownian environment

In this paper, we discuss the valuation of equity warrants in the geometric fractional Brownian environment based on the equilibrium condition. Using the conditional expectation we present a fractional pricing model for equity warrants and analyze the influence of the Hurst parameter. Then we propose an optimization procedure to obtain the valuation of equity warrants. Some numerical examples are given to demonstrate the pricing results by comparing different pricing models. Furthermore, we provide an empirical study to show how to apply our model in realistic contexts, and these comparative results of different pricing models show that the pricing model proposed in this paper matches the actual price quite well.     

Theory of four-dimensional fractional quantum Hall states

We propose a pseudo-potential Hamiltonian for the Zhang-Hu’s generalized fractional quantum Hall states to be the exact and unique ground states. Analogously to Laughlin’s quasi-hole (quasi-particle), the excitations in the generalized fractional quantum Hall states are extended objects. They are vortex-like excitations with fractional charges +(−)1/m³ in the total configuration space CP³. The density correlation function of the Zhang-Hu states indicates that they are incompressible liquid.     

A generalized Tu formula and Hamiltonian structures of fractional AKNS hierarchy

In this Letter, a generalized Tu formula is firstly presented to construct Hamiltonian structures of fractional soliton equations. The obtained results can be reduced to the classical Hamiltonian hierarchy of AKNS in ordinary calculus.     

Scaling and long-range dependence in option pricing II: Pricing European option with transaction costs under the mixed Brownian–fractional Brownian model

This paper deals with the problem of discrete-time option pricing by the mixed Brownian–fractional Brownian model with transaction costs. By a mean-self-financing delta hedging argument in a discrete-time setting, a European call option pricing formula is obtained. In particular, the minimal pricing c_min(t,s_t) of an option under transaction costs is obtained, which shows that timestep δt and Hurst exponent H play an important role in option pricing with transaction costs. In addition, we also show that there exists fundamental difference between the continuous-time trade and discrete-time trade and that continuous-time trade assumption will result in underestimating the value of a European call option.     

Exact solutions for nonlinear fractional anomalous diffusion equations

This work is devoted to investigating exact solutions of generalized nonlinear fractional diffusion equations with external force and absorption. We first investigate the nonlinear anomalous diffusion equations with one-fractional derivative and then multi-fractional ones. In both situations, we obtain the corresponding exact solution, its diffusive behavior, and the sufficient and necessary conditions for solutions satisfying the boundary condition W(±∞,t)=0 and the sharp initial condition W(x,0)=δ(x).