Approximate pricing formula to capture leverage effect and stochastic volatility of a financial asset

Youssef El-Khatib, Stéphane Goutte, Zororo S. Makumbe and Josep Vives

Finance Research Letters, 2022, vol. 44, issue C

Abstract: In this paper we investigate, since both, the theoretical and the empirical point of view, the pricing of European call options under a hybrid CEV-Heston model. CEV-Heston model captures two typical behaviors of financial assets: (i) the leverage effect and (ii) the stochastic volatility. We prove theoretically that the CEV-Heston model covers the leverage-effect and show empirically the volatility clustering property. Then, we utilize a decomposition of the option price to get an approximate formula for European call options. The accuracy of this estimate is compared with the Monte Carlo method. The results show the efficiency of our approximate formula.

Keywords: Heston-CEV model; Stochastic volatility; Leverage effect; Option pricing; Monte Carlo method; Decomposition formula (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (1)

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Working Paper: Approximate pricing formula to capture leverage effect and stochastic volatility of a financial asset (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:44:y:2022:i:c:s1544612321001537

DOI: 10.1016/j.frl.2021.102072

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