Understanding Fractional Differentiation:
Think of it as measuring temperature now vs. its trend over time. In finance:
1. Asset Price Models: Traditional views vs. Fractional differentiation's long-term memory, e.g., Fractional Brownian Motion.
2. Risk Management: Models like VaR become more accurate.
3. Options Pricing: Enhanced with past price trends.
4. Interest Rates: Captures past rate shifts, refining models.
It bridges current data with past patterns, vital in quantitative finance.