Option Valuation with Systematic Stochastic Volatility

Kaushik I Amin and Victor K Ng

Journal of Finance, 1993, vol. 48, issue 3, 881-910

Abstract: The authors use an extension of the equilibrium framework of M. Rubinstein (1976) and M. Brennan (1979) to derive an option valuation formula when the stock return volatility is both stochastic and systematic. Their formula incorporates a stochastic volatility process as well as a stochastic interest rate process in the valuation of options. If the 'mean,'volatility, and 'covariance' processes for the stock return and the consumption growth are predictable, the authors' option valuation formula can be written in 'preference-free'form. Further, many popular option valuation formulae in the literature can be written as special cases of their general formula. Copyright 1993 by American Finance Association.

Date: 1993
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