Stochastic Volatility Models

Norbert Hilber, Oleg Reichmann, Christoph Schwab and Christoph Winter
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Norbert Hilber: Zurich University of Applied Sciences
Oleg Reichmann: Swiss Federal Institute of Technology (ETH)
Christoph Schwab: Swiss Federal Institute of Technology (ETH)
Christoph Winter: Allianz Deutschland AG

Chapter Chapter 9 in Computational Methods for Quantitative Finance, 2013, pp 105-122 from Springer

Abstract: Abstract In Sect. 4.5 , we considered local volatility models as an extension of the Black–Scholes model. These models replace the constant volatility by a deterministic volatility function, i.e. the volatility is a deterministic function of s and t. In stochastic volatility (SV) models, the volatility is modeled as a function of at least one additional stochastic process. Such models can explain some of the empirical properties of asset returns, such as volatility clustering and the leverage effect. These models can also account for long term smiles and skews.

Keywords: Brownian Motion; Bilinear Form; Option Price; Stochastic Volatility; American Option (search for similar items in EconPapers)
Date: 2013
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DOI: 10.1007/978-3-642-35401-4_9

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