Stochastic Volatility and Option Valuation: A Pricing-Density Approach

Francis A. Longstaff

University of California at Los Angeles, Anderson Graduate School of Management from Anderson Graduate School of Management, UCLA

Abstract: We develop a simple closed 0form valuation model for options when the volatility of the underlying asset is stochastic. Out approach differs from previous research in that we model the pricing density directly. We show that implied volatility estimates from the Black-Scholes model can be very misleading, even when at-the-money options are used in the estimation. We also illustrate that the smile effect in index option prices can be explained by allowing changes in volatility to be correlated with index returns.

Date: 1995-01-01
References: Add references at CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://www.escholarship.org/uc/item/1wg89967.pdf;origin=repeccitec (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cdl:anderf:qt1wg89967

Access Statistics for this paper

More papers in University of California at Los Angeles, Anderson Graduate School of Management from Anderson Graduate School of Management, UCLA Contact information at EDIRC.
Bibliographic data for series maintained by Lisa Schiff ().