Numerical solution of the time fractional Black–Scholes model governing European options

Zhang, Hongmei, Liu, Fawang, Turner, Ian, & Yang, Qianqian (2016) Numerical solution of the time fractional Black–Scholes model governing European options. Computers & Mathematics with Applications, 71(9), pp. 1772-1783.

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When considering the price change of the underlying fractal transmission system, a fractional Black–Scholes(B-S) model with an αα-order time fractional derivative is derived. In this paper, we discuss the numerical simulation of this time fractional Black–Scholes model (TFBSM) governing European options. A discrete implicit numerical scheme with a spatially second-order accuracy and a temporally 2−α order accuracy is constructed. Then, the stability and convergence of the proposed numerical scheme are analyzed using Fourier analysis. Some numerical examples are chosen in order to demonstrate the accuracy and effectiveness of the proposed method. Finally, as an application, we use the TFBSM and the above numerical technique to price several different European options.

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ID Code: 95631
Item Type: Journal Article
Refereed: Yes
Keywords: Time fractional Black–Scholes model, Modified Riemann–Liouville fractional derivative, Caputo fractional derivative, European option, Numerical simulation
DOI: 10.1016/j.camwa.2016.02.007
ISSN: 0898-1221
Divisions: Current > Schools > School of Mathematical Sciences
Deposited On: 18 May 2016 23:30
Last Modified: 22 May 2016 23:50

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