Fractional constant elasticity of variance model

Abstract

This paper develops a European option pricing formula for fractional market models. Although there exist option pricing results for a fractional Black-Scholes model, they are established without accounting for stochastic volatility. In this paper, a fractional version of the Constant Elasticity of Variance (CEV) model is developed. European option pricing formula similar to that of the classical CEV model is obtained and a volatility skew pattern is revealed.Comment: Published at http://dx.doi.org/10.1214/074921706000001012 in the IMS Lecture Notes Monograph Series (http://www.imstat.org/publications/lecnotes.htm) by the Institute of Mathematical Statistics (http://www.imstat.org