The application of fractional derivatives in stochastic models driven by fractional Brownian motion |
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Authors: | Lv Longjin Fu-Yao Ren Wei-Yuan Qiu |
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Institution: | Department of Mathematics, Fudan University, Shanghai 200433, China |
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Abstract: | In this paper, in order to establish connection between fractional derivative and fractional Brownian motion (FBM), we first prove the validity of the fractional Taylor formula proposed by Guy Jumarie. Then, by using the properties of this Taylor formula, we derive a fractional Itô formula for H∈1/2,1), which coincides in form with the one proposed by Duncan for some special cases, whose formula is based on the Wick Product. Lastly, we apply this fractional Itô formula to the option pricing problem when the underlying of the option contract is supposed to be driven by a geometric fractional Brownian motion. The case that the drift, volatility and risk-free interest rate are all dependent on t is also discussed. |
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Keywords: | Fractional Taylor formula Fractional Itô formula Fractional Brownian motion Stochastic model Option pricing |
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