Option Pricing under Stochastic Volatility and Trading Volume

Sadayuki Ono

Discussion Papers from Department of Economics, University of York

Abstract: This paper presents a pricing formula for European options derived from a model in which changes in the underlying price and trading volumes are jointly determined by exogenous events. This specification makes increments to the volatility depend on the current level of volatility and news and thereby accounts for the observed persistence in volatility. Moreover, it makes volatility an observable variable. The model accounts well for time varying volatility smiles and term structures, and that out-of-sample price forecasts for a sample of call options are superior to the benchmark ad hoc procedure of plugging implicit volatilities into the Black-Scholes formula.

Keywords: Option valuation; trading volume; the stochastic volatility and volume (SVV) model (search for similar items in EconPapers)
JEL-codes: C52 C53 G12 (search for similar items in EconPapers)
Date: 2007-03
New Economics Papers: this item is included in nep-for
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.york.ac.uk/media/economics/documents/discussionpapers/2007/0705.pdf Main text (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:yor:yorken:07/05

Access Statistics for this paper

More papers in Discussion Papers from Department of Economics, University of York Department of Economics and Related Studies, University of York, York, YO10 5DD, United Kingdom. Contact information at EDIRC.
Bibliographic data for series maintained by Paul Hodgson ().