Pricing and Hedging of Index Derivatives under an Alternative Asset Price Model with Endogenous Stochastic Volatility

David Heath and Eckhard Platen ()
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David Heath: University of Technology Sydney, School of Finance & Economics and Department of Mathematical Sciences, PO Box 123, Broadway, NSW, 2007, Australia

Chapter 10 in Recent Developments in Mathematical Finance, 2001, pp 117-126 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractThe paper discusses a financial market model that generates stochastic volatility using a minimal number of factors. These factors model the dynamics of different denominations of a benchmark portfolio. Asset prices are specified as transformations of square root processes. Numerical results for the pricing and hedging of standard derivatives on indices for this class of models are documented. This includes cases where the standard risk neutral pricing methodology fails but a form of arbitrage still exists. However, payoffs can be perfectly hedged. In addition, the term structure of implied volatilities is documented.

Keywords: Proceedings; Conference; Mathematical Finance; Shanghai (China) (search for similar items in EconPapers)
Date: 2001
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