Pricing Stock Loans with the CGMY Model

Abstract EN

The empirical research shows that the log-return of stock price in finance market rejects the normal distribution and admits a subclass of the asymmetric distribution.

Hence, the pricing problem of stock loan is investigated under the assumption that the log-return of stock price follows the CGMY process in this work.

Under this framework, the pricing model of stock loan can be described by a free boundary condition problem of space-fractional partial differential equation (FPDE).

First of all, in order to change the original model defined in a fixed domain, a penalty term is introduced, and then a first order fully implicit difference schemes is developed.

Secondly, based on the numerical scheme, we prove the stock loan value generated by our method does not fall below the value obtained when the contract of stock loan is exercised early.

Finally, the numerical experiments are implemented and the impacts of key parameters in the CGMY model on the value and optimal redemption price of stock loan are analyzed, and some reasonable explanation should be given.