THE BRITTEN-JONES AND NEUBERGER SMILE-CONSISTENT WITH STOCHASTIC VOLATILITY OPTION PRICING MODEL: A FURTHER ANALYSIS

Alessandro Rossi

International Journal of Theoretical and Applied Finance (IJTAF), 2002, vol. 05, issue 01, 1-31

Abstract: In part of the recent financial literature, exotic option pricing models have been built by establishing a link with European-style options. All these models share the characteristic of being consistent with the observed market smile. They differ respect to the specification of the volatility process. This paper provides a deeper insight into the Britten-Jones and Neuberger (1999) smile-consistent no arbitrage with stochastic volatility option pricing model. Their approach is similar, in spirit, to that one of Derman and Kani (1997), but the implementation is simpler and faster. We explain the main features of the model by performing a set of exercises. In addition we propose some extensions of the model, which make it more flexible.

Keywords: Implied price processes; Markov processes; mean reverting volatility (search for similar items in EconPapers)
Date: 2002
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DOI: 10.1142/S0219024902001286

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