Document Type : Research Article
Authors
1 University of Mazandaran
2 Department of Applied Mathematics, Faculty of Mathematical Sciences, University of Mazandaran, Babolsar, Iran.
3 Faculty of Mathematical sciences, University of Mazandaran, Babolsar, Iran.
Abstract
The aim of this paper is to numerically price the European double barrier option by calculating the governing fractional Black-Scholes equation in illiquid markets. Incorporating the price impact into the underlying asset dynamic, which means that trading strategies affect the underlying price, we consider markets with finite liquidity. We survey both cases of first-order feedback and full feedback. Asset evolution satisfies a stochastic differential equation with fractional noise, which is more realistic in markets with statistical dependence. Moreover, the Sinc-collocation method is used to price the option. Numerical experiments show that the results highly correspond to our expectation of illiquid markets.
Keywords
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