Title of article :
Option valuation in markets with finite liquidity under fractional CEV assets
Author/Authors :
Ghasemifard ، Azadeh Department of Applied Mathematics - Research Core of Stochastic Mathematics and Applications - University of Mazandaran , Banihashemi ، Seddigheh Department of Applied Mathematics - Faculty of Mathematical Sciences, Research Core of Stochastic Mathematics and Applications - University of Mazandaran , Babaei ، Afshin Faculty of Mathematical sciences, Research Core of Stochastic Mathematics and Applications - University of Mazandaran
Abstract :
The aim of this paper is to numerically price the European double barrier option by calculating the governing fractional Black-Scholes equation in illiquid markets. Incorporating the price impact into the underlying asset dynamic, which means that trading strategies affect the underlying price, we consider markets with finite liquidity. We survey both cases of first-order feedback and full feedback. Asset evolution satisfies a stochastic differential equation with fractional noise, which is more realistic in markets with statistical dependence. Moreover, the Sinc-collocation method is used to price the option. Numerical experiments show that the results highly correspond to our expectation of illiquid markets.
Keywords :
Option pricing , Illiquid market , Sinc collocation method , Price impact
Journal title :
Journal of Mathematics and Modeling in Finance
Journal title :
Journal of Mathematics and Modeling in Finance
