The Jacobi Stochastic Volatility Model

Damien Ackerer, Damir Filipović and Sergio Pulido
Additional contact information
Damien Ackerer: Ecole Polytechnique Fédérale de Lausanne; Ecole Polytechnique Fédérale de Lausanne - Swiss Finance Institute
Damir Filipović: Ecole Polytechnique Fédérale de Lausanne; Ecole Polytechnique Fédérale de Lausanne - Swiss Finance Institute
Sergio Pulido: Laboratoire de Mathématiques et Modélisation d'Évry (LaMME); Université d'Évry-Val-d'Essonne, ENSIIE, UMR CNRS 8071

No 16-35, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We introduce a novel stochastic volatility model where the squared volatility of the asset return follows a Jacobi process. It contains the Heston model as a limit case. We show that the the joint distribution of any finite sequence of log returns admits a Gram-Charlier A expansion in closed-form. We use this to derive closed-form series representations for option prices whose payoff is a function of the underlying asset price trajectory at finitely many time points. This includes European call, put, and digital options, forward start options, and forward start options on the underlying return. We derive sharp analytical and numerical bounds on the series truncation errors. We illustrate the performance by numerical examples, which show that our approach offers a viable alternative to Fourier transform techniques.

Keywords: Jacobi process; option pricing; polynomial model; stochastic volatility (search for similar items in EconPapers)
JEL-codes: C32 G12 G13 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2016-05, Revised 2016-06
New Economics Papers: this item is included in nep-ets
References: Add references at CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
http://ssrn.com/abstract=2782486 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1635

Access Statistics for this paper

More papers in Swiss Finance Institute Research Paper Series from Swiss Finance Institute Contact information at EDIRC.
Bibliographic data for series maintained by Ridima Mittal ().