Stochastic Volatility and Option Pricing in the Brazilian Stock Marke

Caio Almeida () and Samy Dana

Journal of Emerging Market Finance, 2005, vol. 4, issue 2, 169-206

Abstract: The stochastic volatility model (SVPS) proposed by Fouque et al. (2000a) explores a rapid timescale fluctuation of the volatility process to end up with a parsimonious way of capturing the volatility smile implied by close to the money options. In this article we test the SVFPS model using options from a Brazilian telecommunications stock. First, we find evidence of fast mean reversion in the volatility process. In addition, to test the model's ability to price options not so close to the money, we extend its statistical estimators to consider, in the calibration process, a wider region for the options moneyness. As an illustration, we price an exotic option.

Keywords: Option prices; stochastic volatility; mean reversion; mean reversion speed; volatility smile (search for similar items in EconPapers)
Date: 2005
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:sae:emffin:v:4:y:2005:i:2:p:169-206

DOI: 10.1177/097265270500400204

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