Derivative pricing with non-linear Fokker-Planck dynamics
Abbreviated Journal Title
econophysics; Black-Scholes derivative pricing; non-extensive statistics; STOCHASTIC-PROCESSES; EQUATION; OPTIONS; Physics, Multidisciplinary
We examine how the Black-Scholes derivative pricing formula is modified when the underlying security obeys non-extensive statistics and Fokker-Planck dynamics. An unusual feature of such securities is that the volatility in the underlying Ito-Langevin equation depends implicitly on the actual market rate of return. This complicates most approaches to valuation. Here we show that progress is possible using variations of the Cox-Ross valuation technique. (C) 2002 Elsevier Science B.V. All rights reserved.
Physica a-Statistical Mechanics and Its Applications
Article; Proceedings Paper
"Derivative pricing with non-linear Fokker-Planck dynamics" (2003). Faculty Bibliography 2000s. 3927.