Option pricing model under the G-expectation framework
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arXiv
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| Main Authors: | , , |
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| Format: | Preprint |
| Published: |
2026
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| _version_ | 1866915886461353984 |
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| author | Pei, Ziting Yue, Xingye Zheng, Xiaotao |
| author_facet | Pei, Ziting Yue, Xingye Zheng, Xiaotao |
| contents | G-expectation, as a sublinear expectation, provides a powerful framework for modeling uncertainty in financial markets. Motivated by the need for robust valuation under model uncertainty, this work develops a unified risk-neutral valuation approach within the G-expectation environment, yielding a nonlinear generalization of the Black-Scholes model, termed the G-Black-Scholes equation. To enhance computational efficiency and reduce numerical cost, we introduce a logarithmic transformation of the asset price, which yields an alternative nonlinear PDE. Based on this transformed formulation, we design both explicit and implicit finite difference schemes that are rigorously demonstrated to be consistent, stable, monotone, and convergent to the viscosity solution. Numerical examples confirm that the proposed schemes achieve high accuracy, while the logarithmic transformation relaxes the stability constraints of explicit schemes and improves computational efficiency. |
| format | Preprint |
| id |
arxiv_https___arxiv_org_abs_2603_22831 |
| institution | arXiv |
| publishDate | 2026 |
| record_format | arxiv |
| spellingShingle | Option pricing model under the G-expectation framework Pei, Ziting Yue, Xingye Zheng, Xiaotao Computational Engineering, Finance, and Science Mathematical Finance G-expectation, as a sublinear expectation, provides a powerful framework for modeling uncertainty in financial markets. Motivated by the need for robust valuation under model uncertainty, this work develops a unified risk-neutral valuation approach within the G-expectation environment, yielding a nonlinear generalization of the Black-Scholes model, termed the G-Black-Scholes equation. To enhance computational efficiency and reduce numerical cost, we introduce a logarithmic transformation of the asset price, which yields an alternative nonlinear PDE. Based on this transformed formulation, we design both explicit and implicit finite difference schemes that are rigorously demonstrated to be consistent, stable, monotone, and convergent to the viscosity solution. Numerical examples confirm that the proposed schemes achieve high accuracy, while the logarithmic transformation relaxes the stability constraints of explicit schemes and improves computational efficiency. |
| title | Option pricing model under the G-expectation framework |
| topic | Computational Engineering, Finance, and Science Mathematical Finance |
| url | https://arxiv.org/abs/2603.22831 |