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The valuation of European option with transaction costs by mixed fractional Merton model

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  • Foad Shokrollahi
Abstract
This paper deals with the problem of discrete-time option pricing by the mixed fractional version of Merton model with transaction costs. By a mean-self-financing delta hedging argument in a discrete-time setting, a European call option pricing formula is obtained. We also investigate the effect of the time-step $\delta t$ and the Hurst parameter $H$ on our pricing option model, which reveals that these parameters have high impact on option pricing. The properties of this model are also explained.

Suggested Citation

  • Foad Shokrollahi, 2017. "The valuation of European option with transaction costs by mixed fractional Merton model," Papers 1702.00152, arXiv.org.
    • Handle: RePEc:arx:papers:1702.00152
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    References listed on IDEAS

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    1. Xiao, Wei-Lin & Zhang, Wei-Guo & Zhang, Xili & Zhang, Xiaoli, 2012. "Pricing model for equity warrants in a mixed fractional Brownian environment and its algorithm," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 391(24), pages 6418-6431.
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