Quadratic approximation of slow factor of volatility in a Multi-factor Stochastic volatility Model

Gifty Malhotra, R. Srivastava and H. C. Taneja

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Abstract: In the present work, we propose a new multifactor stochastic volatility model in which slow factor of volatility is approximated by a parabolic arc. We retain ourselves to the perturbation technique to obtain approximate expression for European option prices. We introduce the notion of modified Black-Scholes price. We obtain a simplified expression for European option price which is perturbed around the modified Black-Scholes price and have also obtained the expression of modified price in terms of Black-Scholes price.

Date: 2017-03
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1703.10825

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