This study examines the effect of fractional volatility on option prices. To this end, we develop an approximation method for the pricing of European-style contingent claims when volatility follows a fractional Brownian motion. Through extensive numerical experiments, we confirm that the...

In the option pricing literature, it is well known that:(i) the decrease in the smile amplitude is much slower than standard stochastic volatility models and, (ii) the term structure of the at-the-money volatility skew is approximated by a power-law function with the exponent close to zero....