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Explicit solution simulation method for the 3/2 model

Iro Ren\'e Kouarfate, Michael A. Kouritzin and Anne MacKay

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Abstract: An explicit weak solution for the 3/2 stochastic volatility model is obtained and used to develop a simulation algorithm for option pricing purposes. The 3/2 model is a non-affine stochastic volatility model whose variance process is the inverse of a CIR process. This property is exploited here to obtain an explicit weak solution, similarly to Kouritzin (2018). A simulation algorithm based on this solution is proposed and tested via numerical examples. The performance of the resulting pricing algorithm is comparable to that of other popular simulation algorithms.

Date: 2020-09, Revised 2021-01
New Economics Papers: this item is included in nep-cmp
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Handle: RePEc:arx:papers:2009.09058