A hybrid stochastic volatility model in a Lévy market

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

International Review of Economics & Finance, 2023, vol. 85, issue C, 220-235

Abstract: This paper deals with the problem of pricing and hedging financial options in a hybrid stochastic volatility model with jumps and a comparative study of its stylized facts. Under these settings, the market is incomplete, which leads to the existence of infinitely many risk-neutral measures. In order to price an option, a set of risk-neutral measures is determined. Moreover, the PIDE of an option price is derived using the Itô formula. Furthermore, Malliavin–Skorohod Calculus is utilized to hedge options and compute price sensitivities. The obtained results generalize the existing pricing and hedging formulas for the Heston as well as for the CEV stochastic volatility models.

Keywords: European options; Numerical simulations; Monte Carlo method; Stochastic volatility Black and Scholes Formula; Lévy processes (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:85:y:2023:i:c:p:220-235

DOI: 10.1016/j.iref.2023.01.005

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