Title

Derivative pricing with non-linear Fokker-Planck dynamics

Authors

Authors

F. Michael;M. D. Johnson

Comments

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Abbreviated Journal Title

Physica A

Keywords

econophysics; Black-Scholes derivative pricing; non-extensive statistics; STOCHASTIC-PROCESSES; EQUATION; OPTIONS; Physics, Multidisciplinary

Abstract

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.

Journal Title

Physica a-Statistical Mechanics and Its Applications

Volume

324

Issue/Number

1-2

Publication Date

1-1-2003

Document Type

Article; Proceedings Paper

Language

English

First Page

359

Last Page

365

WOS Identifier

WOS:000183262400052

ISSN

0378-4371

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