Pricing Fractal Derivatives under Sub-Mixed Fractional Brownian Motion with Jumps

Abstract

We study the pricing of derivative securities in financial markets modeled by a sub-mixed fractional Brownian motion with jumps (smfBm-J), a non-Markovian process that captures both long-range dependence and jump discontinuities. Under this model, we derive a fractional integro-partial differential equation (PIDE) governing the option price dynamics. Using semigroup theory, we establish the existence and uniqueness of mild solutions to this PIDE. For European options, we obtain a closed-form pricing formula via Mellin-Laplace transform techniques. Furthermore, we propose a Grunwald-Letnikov finite-difference scheme for solving the PIDE numerically and provide a stability and convergence analysis. Empirical experiments demonstrate the accuracy and flexibility of the model in capturing market phenomena such as memory and heavy-tailed jumps, particularly for barrier options. These results underline the potential of fractional-jump models in financial engineering and derivative pricing.