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Pricing of Bi-direction European Option Under the mixed Brownian-fractional Brownian model

Feng Xu

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Abstract

Assuming that the stock price obeys the stochastic differential equation driven by the mixed Brownian-fractional Brownian motion, we establish the mathematical model for the financial market in the mixed Brownian-fractional Brownian motion setting with Hurst parameter greater than 0.5. Under the fractional risk neutral measure, we get the unique equivalent measure by using fractional Girsanov theorem. With quasi-martingale method, we obtain the general pricing formula for the Bi-direction European option, which makes the fractional Brownian motion as an especial case.

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Assuming that the stock price obeys the stochastic differential equation driven by the mixed Brownian-fractional Brownian motion, we establish the mathematical model for the financial market in the mixed Brownian-fractional Brownian motion setting with Hurst parameter greater than 0.5. Under the fractional risk neutral measure, we get the unique equivalent measure by using fractional Girsanov theorem. With quasi-martingale method, we obtain the general pricing formula for the Bi-direction European option, which makes the fractional Brownian motion as an especial case.

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Available abstract

Assuming that the stock price obeys the stochastic differential equation driven by the mixed Brownian-fractional Brownian motion, we establish the mathematical model for the financial market in the mixed Brownian-fractional Brownian motion setting with Hurst parameter greater than 0.5. Under the fractional risk neutral measure, we get the unique equivalent measure by using fractional Girsanov theorem. With quasi-martingale method, we obtain the general pricing formula for the Bi-direction European option, which makes the fractional Brownian motion as an especial case.

Key concepts: Fractional Brownian motion, Girsanov theorem, Martingale representation theorem, Brownian excursion, Mathematics, Geometric Brownian motion, Brownian motion, Hurst exponent

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