A data-reconstructed fractional volatility model

• Author(s): Mendes, Rui Vilela ; Oliveira, Maria João
• Date: 2008
• Persistent ID: http://hdl.handle.net/10400.2/1711
• Origin: Repositório Aberto da Universidade Aberta
• Subject(s): Fractional noise; Induced volatility; Statistics of returns; Option pricing
• Document Type: Article
• Language: English

Description

Based on criteria of mathematical simplicity and consistency with empirical market data, a stochastic volatility model is constructed, the volatility process being driven by fractional noise. Price return statistics and asymptotic behavior are derived from the model and compared with data. Deviations from Black-Scholes and a new option pricing formula are also obtained.