Asymptotic expansion of European options with mean-reverting stochastic volatility dynamics
Research output: Contribution to journal › Article › Scientific › peer-review
|Number of pages||10|
|Journal||Finance Research Letters|
|Publication status||Published - Aug 2015|
|Publication type||A1 Journal article-refereed|
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.
- Option pricing, Series expansion, Partial Differential Equations, Stochastic volatility, Non-affine models