Black-Scholes Model under G-Lévy Process

In this paper, we study the option price theory of stochastic differential equations under G-Lévy process. By using G-Itô formula and G-expectation property, we give the proof of Black-Scholes equations (Integro-PDE) under G-Lévy process. Finally, we give the simulation of G-Lévy process and the explicit solution of Black-Scholes under G-Lévy process.


Introduction
Nowadays, many studies are interested in stochastic differential equations (SDEs). And SDEs have been widely applied to economics and finance fields, such as option pricing in stock market see [1]. In the 1970s, Black and Scholes propose the famous option pricing model and promote the development of stocks, bonds, currencies, products. Subsequently, the famous Black-Scholes formula was paid more attention by many scholars. In 1976, Merton [2] proposed the logarithmic jump-diffusion models in stock price, which was described as a combination of Brownian motion and compound Poisson process.
Although option pricing formula has developed for a long time, there are many uncertainty problems in stock market. Many scholars have been studied the uncertainty problem. For example, Peng [3] [4] proposed the sublinear expectation space to solve the uncertainty problem. In particular, the G-expectation space plays an important role in solving them. Then the G-Brownian motion, G-Itô formula and G-center limit theorem are proposed for us in G-expectation framework. In this paper, we consider the following stock price t S such that: where a is the interest rate, b is the volatility and c is the jump range of asset price, t W is a G-Brownian motion and t L is a G-Lévy process under the distribution under G-expectation and Chai studies the option pricing for stochastic differential equation under G-framework. Although G-Brownian motion solved many financial issues, some financial models that depend on the Lévy processes remain unresolved. Therefore, Peng and Hu [6] studied the G-Lévy process, which is the generalization of G-Brownian motion. And Krzysztof [7] introduced G-Itô formula and G-martingale representation for G-Lévy process.
In this paper, we study Black-Scholes model under G-Lévy process and prove the Integro-PDE by using G-Itô formula, option pricing formula and G-expectation property. Then we simulate the G-Lévy process and the stock price t S by using the new algorithms. Meanwhile, we give a numerical example to verify the result of simulation.
We introduce some notation as follows: • C: a generic constant depending only on the upper bounds of derivatives of , , a b c and h, and C can be different from line to line.
The outline of the paper is as follows. In Section 2, we introduce some necessary notations and theorems, such as the G-Lévy process and G-Itô formula. In Section 3, we propose a new theorem that gives the proof of Black-Scholes equations (Integro-PDE) under G-Lévy process. Finally, some numerical simulations for G-Lévy process and stock price are given in Section 4.

Preliminaries
In this section, we will introduce some basic knowledge and notation that is the focus of this paper. Throughout this paper, we will give the definition of G-Lévy process. Unless otherwise specified, we use the following notations. Let 1 2 , be the Euclidean norm in q  and , x y is the scalar product of , x y . If A is a vector or matrix, its transpose is denoted by A T . Next, we will give the definition of Sublinear expectation and G-Lévy process. Definition 1. [6] (Sublinear expectation) Let  is a linear space and 1 2 , X X ∈  , we give the definition of sublinear expectation Therefore, we call the triple ( ) , , Ω   a sublinear expectation space.

Definition 2. [6] (G-Lévy process) Assume
is a Lévy process, f s X is a generalized G-Brownian motion and g s X is of finite variation. We say the X is a G-Lévy process if satisfy the following conditions: i t X is the k-th component of t X and it satisfies the following form: (2) is true, we have the following Lévy-Khintchine

Black-Scholes Equations under G-Lévy Process
In this section, we will give the Black-Scholes equations under G-Lévy process, and prove the Integro-PDE by combining the G-Itô formula and the option pricing formula.
In the G-expectation space, we have the following product rule: Then, it is well known that the option pricing formula following form n n a n t n n n t a a n u S t u S t u S t S S u S t r r n a n a n a n t a a n t a n a n a n a n n a a a n n a a u S t u S t n a n a a a n n a n a a a a a n a n a a u S t u S t n a a a n n a a a n n n t a n  Next, we will introduce the Black-Scholes formula with jump under the G-Lévy process, and it is the generation of classical Black-Scholes formula. In [6], where the initial value 0 0 S = , the interest rate a and volatility b are positive, t W is a G-brownian motion and t L is a G-Lévy process. Next, we give the explicit solution of Equation (6) simulate the stock price t S . And the simulation of t S are given in Figure 3 with three different coefficients.
Because the interest rate a, volatility b and jump intensity c are variable, we study the influence of volatility b and jump intensity c on stock price t S . Let , we plot the stock price t S with the time t under the different coefficients Figure 4. And we obtain the stock price t S will decrease with the increase of the volatility b. Figure 2. The simulation of G-Lévy process.

Conclusion
In this paper, by using G-Itô formula and G-expectation property, we prove the Integro-PDE under G-Lévy process. Then we study the influence of coefficients on stock price t S , and obtain the coefficients , a b that have a great influence on stock price t S . In the future, we will study the numerical scheme for solving the Integro-PDE. And the numerical scheme is important in financial field.