THE VALUATION OF EUROPEAN OPTION UNDER SUBDIFFUSIVE FRACTIONAL BROWNIAN MOTION OF THE SHORT RATE

Abstract

In this paper, we propose an extension of the Merton model. We apply the subdiffusive mechanism to analyze European option in a fractional Black–Scholes environment, when the short rate follows the subdiffusive fractional Black–Scholes model. We derive a pricing formula for call and put options and discuss the corresponding fractional Black–Scholes equation. We present some features of our model pricing model for the cases of [Formula: see text] and [Formula: see text].