RT Journal Article SR Electronic T1 An Arbitrage-Free Real-World Model for Fractional Option Prices JF The Journal of Derivatives FD Institutional Investor Journals SP 95 OP 121 DO 10.3905/jod.2021.1.128 VO 29 IS 1 A1 Holger Fink YR 2021 UL https://pm-research.com/content/29/1/95.abstract AB I introduce a new model class driven by a certain transformation of fractional Lévy processes with an additional jump part. Not only am I able to show that these models are free of arbitrage and allow for an explicit measure change to an equivalent martingale measure, but they also contain the Black-Scholes setting as a special case. Therefore, this fractional model class can be viewed as a natural no-arbitrage extension of the classical setup.TOPICS: Statistical methods, derivatives, optionsKey Findings▪ I present a model class driven by (a transformation of) fractional Lévy processes, which still fits into the classical semimartingale framework.▪ Derivative prices are discounted conditional expectations with respect to the driving fractional Lévy processes.▪ The classical Black-Scholes and Merton models are nested within the presented framework.