A Note on Option Pricing with the Use of Discrete-Time Stochastic Volatility Processes

Anna Pajor

Central European Journal of Economic Modelling and Econometrics, 2009, vol. 1, issue 1, 71-81

Abstract: In this paper we show that in the lognormal discrete-time stochastic volatility model with predictable conditional expected returns, the conditional expected value of the discounted payoff of a European call option is infinite. Our empirical illustration shows that the characteristics of the predictive distributions of the discounted payoffs, obtained using Monte Carlo methods, do not indicate directly that the expected discounted payoffs are infinite.

Keywords: option pricing; SV model; Bayesian forecasting (search for similar items in EconPapers)
JEL-codes: C11 C22 C53 (search for similar items in EconPapers)
Date: 2009
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Persistent link: https://EconPapers.repec.org/RePEc:psc:journl:v:1:y:2009:i:1:p:71-81

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