Uncertain Parameters, an Empirical Stochastic Volatility Model and Confidence Limits

Paul Wilmott () and Asli Oztukel
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Paul Wilmott: Mathematical Institute, 24-29 St Giles', Oxford, OX1 3LB, UK;
Asli Oztukel: Mathematics Institute, 24-29 St Giles', Oxford, OX1 3LB, UK

International Journal of Theoretical and Applied Finance (IJTAF), 1998, vol. 01, issue 01, 175-189

Abstract: In this paper we build upon the recently developed uncertain parameter framework for valuing derivatives in a worst-case scenario. We start by deriving a stochastic volatility model based on a simple analysis of time-series data. We use this stochastic model to examine the time evolution of volatility from an initial known value to a steady-state distribution in the long run. This empirical model is then incorporated into the uncertain parameter option valuation framework to provide "confidence limits" for the option value.

Date: 1998
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Persistent link: https://EconPapers.repec.org/RePEc:wsi:ijtafx:v:01:y:1998:i:01:n:s0219024998000096

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DOI: 10.1142/S0219024998000096

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