A Study of the Warrant Pricing Model Based on Multifractality

Abstract

Nowadays the studies of the fractal B-S warrant pricing model are assumed the Hurst exponent of the entire time period and the volatility rate are all constant. However, various studies show that the price volatility of the stock market has multifractal characteristics. This paper takes Gezhou Dam warrants in China as an example, and quotes a new volatility rate measure method (MFV measure) to improve the fractal B-S warrant pricing model. And we use the multifractal detrended fluctuation analysis (MF-DFA) method to test whether the logarithmic daily return rate sequences of Gezhou Dam are multiracial and calculate the Hurst exponent. Finally and respectively, based on the MFV measure and the existing constant volatility rate measure we compare the warrant price errors with one instance. The empirical results show that the stock price volatility of Chinese stock market is indeed significantly multifractal, and for warrants, the multifractal volatility rate measure proposed in this study has smaller errors than the constant volatility rate measure.