Time-changed generalized mixed fractional Brownian motion and application to arithmetic average Asian option pricing

  • Authors

    • ömer önalan Faculty of Business Administration, Marmara University, Turkey
    2017-06-13
    https://doi.org/10.14419/ijamr.v6i3.7688
  • Arithmetic Average Asian Option Pricing, Generalized Mixed Fractional Brownian motion, Inverse Gamma Subordination, Time-Chanced Processes.

  • Abstract

    In this paper we present a novel model to analyze the behavior of random asset price process under the assumption that the stock price pro-cess is governed by time-changed generalized mixed fractional Brownian motion with an inverse gamma subordinator. This model is con-structed by introducing random time changes into generalized mixed fractional Brownian motion process. In practice it has been observed that many different time series have long-range dependence property and constant time periods. Fractional Brownian motion provides a very general model for long-term dependent and anomalous diffusion regimes. Motivated by this facts in this paper we investigated the long-range dependence structure and trapping events (periods of prices stay motionless) of CSCO stock price return series. The constant time periods phenomena are modeled using an inverse gamma process as a subordinator. Proposed model include the jump behavior of price process because the gamma process is a pure jump Levy process and hence the subordinated process also has jumps so our model can be capture the random variations in volatility. To show the effectiveness of proposed model, we applied the model to calculate the price of an average arithmetic Asian call option that is written on Cisco stock. In this empirical study first the statistical properties of real financial time series is investigated and then the estimated model parameters from an observed data. The results of empirical study which is performed based on the real data indicated that the results of our model are more accuracy than the results based on traditional models.

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  • How to Cite

    önalan, ömer. (2017). Time-changed generalized mixed fractional Brownian motion and application to arithmetic average Asian option pricing. International Journal of Applied Mathematical Research, 6(3), 85-92. https://doi.org/10.14419/ijamr.v6i3.7688

    Received date: 2017-04-30

    Accepted date: 2017-05-22

    Published date: 2017-06-13