Derivative pricing with non-linear Fokker-Planck dynamics

    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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