Scandinavian Working Papers in Business Administration

Working Papers,
Örebro University, School of Business

No 2024:1: Subdiffusive option price model with Inverse Gaussian subordinator

Nataliya Shchestyuk () and Sergii Tyshchenkob ()
Additional contact information
Nataliya Shchestyuk: Örebro University School of Business, Postal: Örebro University, School of Business, SE - 701 82 ÖREBRO, Sweden
Sergii Tyshchenkob: National University of Kyiv-Mohyla Academy, Postal: Faculty of Informatics, National University of Kyiv-Mohyla Academy, Scovoroda Street, 2, Kyiv, 04070, Ukraine

Abstract: The paper focuses on the option price subdiffusive model under the unusual behavior of the market, when the price may not be changed for some time which is quite a common situation in the modern financial markets or during global crises. In the model, the risk-free bond motion and classical GBM are time-changed by an inverted inverse Gaussian (IG) subordinator. We explore the correlation structure of the subdiffusive GBM stock returns process, discuss option pricing techniques based on the fractal Dupire equation, and demonstrate how it applies in the case of the IG subordinator.

Keywords: Option pricing; Subdiffusion models; Subordinator; Inverse subordinator; Time-changed process; Hitting time

JEL-codes: C02; C53; G12

Language: English

16 pages, January 17, 2024

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