Itô's formula with respect to fractional Brownian motion and its application
Open Access
- 1 January 1996
- journal article
- research article
- Published by Hindawi Limited in Journal of Applied Mathematics and Stochastic Analysis
- Vol. 9 (4) , 439-448
- https://doi.org/10.1155/s104895339600038x
Abstract
Fractional Brownian motion (FBM) with Hurst index 1/2<H<1 is not a semimartingale. Consequently, the standard Itô calculus is not available for stochastic integrals with respect to FBM as an integrator if 1/2<H<1. In this paper we derive a version of Itô's formula for fractional Brownian motion. Then, as an application, we propose and study a fractional Brownian Scholes stochastic model which includes the standard Black-Scholes model as a special case and is able to account for long range dependence in modeling the price of a risky asset. This article is dedicated to the memory of Roland L. Dobrushin.Keywords
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