Stochastic Volatility Option Pricing Models

Cheng-Few Lee (), Hong-Yi Chen () and John Lee ()
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Cheng-Few Lee: Rutgers University, Department of Finance and Economics, Rutgers Business School
Hong-Yi Chen: National Chengchi University, Department of Finance
John Lee: Center for PBBEF Research

Chapter Chapter 17 in Financial Econometrics, Mathematics and Statistics, 2019, pp 461-472 from Springer

Abstract: Abstract In this chapter, we assume that the volatility of option pricing modelOption pricing model is stochastic instead of deterministic. We apply such assumption to the nonclosed-form solution developed by Scott (J Finance Quant Anal 22:419–438, 1987) and the closed-form solution of Heston (Rev Financ Stud 6:327–343, 1993). In both cases, we consider a model in which the variance of stock-price returns varies according to an independent diffusion process. For the closed-form option pricing modelOption pricing model, the results are expressed in terms of the characteristic functionCharacteristic function.

Keywords: Characteristic function; Closed-form option pricing model; Heston’s model; Itô’s lemma; Moment-generating function; Nonclosed-form option pricing model (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-1-4939-9429-8_17

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DOI: 10.1007/978-1-4939-9429-8_17

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