Asset Pricing with Random Volatility

Xin Liu

Papers from arXiv.org

Abstract: This paper proposes to model asset price dynamics with a mixture of diffusion processes where the instantaneous volatility of the underlying diffusion process contains a random vector. The marginal probability distributions of the proposed process can match exactly the risk-neutral distributions implied by both spot vanilla options and forward start options. We can also derive the explicit pricing formula for derivatives that have a closed-form solution under Generalized Geometric Brownian Motion.

Date: 2016-10, Revised 2018-09
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