Analytic properties of American option prices under a modified Black–Scholes equation with spatial fractional derivatives

Abstract

This paper investigates analytic properties of American option prices under the finite moment log-stable (FMLS) model. Under this model the price of American options is characterized by a nonlinear fractional partial differential equation (FPDE) system. Using the technique of approximation, we prove that the American put price under the FMLS model is convex with respect to the underlying price, and specify the impact of the tail index on option prices. We also show numerical examples to support our analytic results.