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Option Pricing under Double Heston Jump-Diffusion Model with Approximative Fractional Stochastic Volatility

Author

Listed:
  • Ying Chang

    (School of Economics, Peking University, Beijing 100871, China
    These authors contributed equally to this work.)

  • Yiming Wang

    (School of Economics, Peking University, Beijing 100871, China
    These authors contributed equally to this work.)

  • Sumei Zhang

    (School of Science, Xi’an University of Posts and Telecommunications, Xi’an 710121, China
    These authors contributed equally to this work.)

Abstract
Based on the present studies about the application of approximative fractional Brownian motion in the European option pricing models, our goal in the article is that we adopt the creative model by adding approximative fractional stochastic volatility to double Heston model with jumps since approximative fractional Brownian motion is more proper for application than Brownian motion in building option pricing models based on financial market data. We are the first to adopt the creative model. We derive the pricing formula for the options and the formula for the characteristic function. We also estimate the parameters with the loss function for the model and two nested models and compare the performance among those models based on the market data. The outcome illustrates that the model offers the best performance among the three models. It demonstrates that approximative fractional Brownian motion is more proper for application than Brownian motion.

Suggested Citation

  • Ying Chang & Yiming Wang & Sumei Zhang, 2021. "Option Pricing under Double Heston Jump-Diffusion Model with Approximative Fractional Stochastic Volatility," Mathematics, MDPI, vol. 9(2), pages 1-10, January.
    • Handle: RePEc:gam:jmathe:v:9:y:2021:i:2:p:126-:d:476671
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    References listed on IDEAS

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    2. Gholamreza Farahmand & Taher Lotfi & Malik Zaka Ullah & Stanford Shateyi, 2023. "Finding an Efficient Computational Solution for the Bates Partial Integro-Differential Equation Utilizing the RBF-FD Scheme," Mathematics, MDPI, vol. 11(5), pages 1-13, February.

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