Stochastic Volatility

Carl Chiarella, Xuezhong (Tony) He () and Christina Sklibosios Nikitopoulos
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Christina Sklibosios Nikitopoulos: University of Technology Sydney

Chapter Chapter 15 in Derivative Security Pricing, 2015, pp 315-347 from Springer

Abstract: Abstract Empirical studies show that the volatility of asset returns are not constant and the returns are more peaked around the mean and have fatter tails than implied by the normal distribution. These empirical observations have led to models in which the volatility of returns follows a diffusion process. In this chapter, we introduce some stochastic volatility models and consider option prices under stochastic volatility. In particular, we consider the solutions of the option pricing when volatility follows a mean-reverting diffusion process. We also introduce the Heston model, one of the most popular stochastic volatility models.

Keywords: Asset Price; Option Price; Stochastic Volatility; Implied Volatility; Stochastic Volatility Model (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:spr:dymchp:978-3-662-45906-5_15

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DOI: 10.1007/978-3-662-45906-5_15

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