Asymptotic expansion of European options with mean-reverting stochastic volatility dynamics
Research output: Contribution to journal › Article › Scientific › peer-review
Details
| Original language | English |
|---|---|
| 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