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

Authors:	Hui Gu Jin-Rong Liang Yun-Xiu Zhang

Institution:	1. Department of Mathematics, East China Normal University, Shanghai 200241, China;2. Department of Mathematics, Nanjing Forest University, Nanjing 210037, China

Abstract:	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.

Keywords:	Option pricing Transaction costs Delta-hedging Time-changed process Inverse α $α$ -stable subordinator" target="_blank">gif" overflow="scroll">α-stable subordinator
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