Pricing Catastrophe Equity Put Options in a Mixed Fractional Brownian Motion Environment

Abstract EN

This paper considers the pricing of the CatEPut option (catastrophe equity put option) in a mixed fractional model in which the stock price is governed by a mixed fractional Brownian motion (mfBM model), which manifests long-range correlation and fluctuations from the financial market.

Using the conditional expectation and the change of measure technique, we obtain an analytical pricing formula for the CatEPut option when the short interest rate is a deterministic and time-dependent function.

Furthermore, we also derive analytical pricing formulas for the catastrophe put option and the influence of the Hurst index when the short interest rate follows an extended Vasicek model governed by another mixed fractional Brownian motion so that the environment captures the long-range dependence of the short interest rate.

Based on the numerical experiments, we analyze quantitatively the impacts of different parameters from the mfBM model on the option price and hedging parameters.

Numerical results show that the mfBM model is more close to the realistic market environment, and the CatEPut option price is evaluated accurately.