The Pricing of Options on Assets with Stochastic Volatilities

John C Hull and Alan White

Journal of Finance, 1987, vol. 42, issue 2, 281-300

Abstract: One option-pricing problem which has hitherto been unsolved is the pricing of European call on an asset which has a stochastic volatility. This paper examines this problem. The option price is determined in series form for the case in which the stochastic volatility is independent of the stock price. Numerical solutions are also produced for the case in which the volatility is correlated with the stock price. It is found that the Black-Scholes price frequently overprices options and that the degree of overpricing increases with the time to maturity. Copyright 1987 by American Finance Association.

Date: 1987
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