Option pricing under normal dynamics with stochastic volatility

Matta Uma Maheswara Reddy

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Abstract: In this paper, we derive the price of a European call option of an asset following a normal process assuming stochastic volatility. The volatility is assumed to follow the Cox Ingersoll Ross (CIR) process. We then use the fast Fourier transform (FFT) to evaluate the option price given we know the characteristic function of the return analytically. We compare the results of fast Fourier transform with the Monte Carlo simulation results of our process. Further, we present a numerical example to understand the normal implied volatility of the model.

Date: 2019-09, Revised 2019-10
New Economics Papers: this item is included in nep-ore
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1909.08047

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