Stochastic volatility and the mean reverting process

Sotirios Sabanis

Journal of Futures Markets, 2003, vol. 23, issue 1, 33-47

Abstract: This article employs an approach that is an extension of the Hull and White ( 1987 ) model, for pricing European options under the assumption of a mean reverting volatility for the underlying asset. The approach uses a Taylor series expansion method to approximate the price of a European call option in a market with no arbitrage opportunities. The transition to a riskneutral economy is accomplished by introducing an equivalent martingale measure based on the findings of Romano and Touzi ( 1997 ). Numerical results are obtained and compared with similar studies (Lewis, 2000 ). © 2003 Wiley Periodicals, Inc. Jrl Fut Mark 23:33–47, 2003

Date: 2003
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