An extension of stochastic differential models by using the Grunwald-Letnikov fractional derivative

Document Type : Research Articles

Authors

1 Financial Mathematics, Finance Department, Kharazmi University, Tehran, Iran

2 Department of Financial Sciences, Kharazmi University, Tehran, Iran

Abstract

Stochastic differential equations (SDEs) have been applied by engineers and economists because it can express the behavior of stochastic processes in compact expressions. In this paper, by using Grunwald-Letnikov fractional derivative, the stochastic differential model is improved. Two numerical examples are presented to show efficiency of the proposed model. A numerical optimization approach based on least square approximation is applied to determine the order of the fractional derivative. Numerical examples show that the proposed model works better than the SDE to model stochastic processes with memory.

Keywords