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  • APPROXIMATE PRICING OF DERIVATIVES UNDER FRACTIONAL STOCHASTIC VOLATILITY MODEL

  • Part of
  • Y. HAN, X. ZHENG
  • Journal:
    The ANZIAM Journal / Volume 65 / Issue 3 / July 2023
    Published online by Cambridge University Press:
    15 January 2024, pp. 229-247
    • Article
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  • This paper examines the issue of derivative pricing within the framework of a fractional stochastic volatility model. We present a deterministic partial differential equation system to derive an approximate expression for the derivative price. The proposed approach allows for the stochastic volatility to be expressed as a composition of deterministic functions of time and a fractional Ornstein–Uhlenbeck process. We apply this method to the European option pricing under the fractional Stein–Stein volatility model, demonstrating its feasibility and reliability through numerical simulations. Our numerical simulations also illustrate the impact of the parameters in the fractional stochastic volatility model on the option price.