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Long-Range Dependence in the Risk-Neutral Measure for the Market on Lehman Brothers Collapse

ABSTRACT This paper discusses the long-range dependence in the risk-neutral stock return process of the S&P 500 index option market. To observe the long-range dependence together with fat-tails, I define the parametric model of fractional Lévy process. Since the continuous time fractional Lévy process allows arbitrage, I use discrete time option pricing model based on the fractional Lévy process. By model calibration, we can capture the long-range dependence in the S&P 500 index option market. The paper finds that the long range dependence becomes stronger for the volatile market caused by the Lehman Brothers Collapse, comparing with other less volatility markets.