Asymptotic expansion of European options with mean-reverting stochastic volatility dynamics
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Details
Original language | English |
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Pages (from-to) | 1-10 |
Number of pages | 10 |
Journal | Finance Research Letters |
Volume | 14 |
DOIs | |
Publication status | Published - Aug 2015 |
Publication type | A1 Journal article-refereed |
Abstract
We develop methods for pricing European options under general mean-reverting stochastic volatility dynamics, which can be used with both affine and non-affine volatility models. In our methods, the option price under stochastic volatility is expanded as a power series of parameters or variables by transferring the original partial differential equation to a set of solvable inhomogeneous Black–Scholes equations. The analytic approximation is more generally applicable than the fast Fourier transform, because it does not rely on the existence of a characteristic function. Finally, we numerically demonstrate our approach with the Heston, 3/2, and continuous-time GARCH models.
ASJC Scopus subject areas
Keywords
- Option pricing, Series expansion, Partial Differential Equations, Stochastic volatility, Non-affine models