EconPapers    
Economics at your fingertips  
 

Joint Characteristic Function of Stock Log-Price and Squared Volatility in the Bates Model and Its Asset Pricing Applications

Oleksandr Zhylyevskyy ()

Staff General Research Papers Archive from Iowa State University, Department of Economics

Abstract: The model of Bates specifies a rich, flexible structure of stock dynamics suitable for applications in finance and economics, including valuation of derivative securities. This paper analytically derives a closed-form expression for the joint conditional characteristic function of a stock's log-price and squared volatility under the model dynamics. The use of the function, based on inverting it, is illustrated on examples of pricing European-, Bermudan-, and American-style options. The discussed approach for European-style derivatives improves on the option formula of Bates. The suggested approach for American-style derivatives, based on a compound-option technique, offers an alternative solution to existing finite-difference methods.

Keywords: stochastic volatility; Bates model; jump-diffusion; characteristic function; option pricing (search for similar items in EconPapers)
Date: 2012-10-31
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Published in Theoretical Economics Letters, October 2012, vol. 2 no. 4, pp. 400-407

Downloads: (external link)
http://dx.doi.org/10.4236/tel.2012.24074

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:isu:genres:35559

Access Statistics for this paper

More papers in Staff General Research Papers Archive from Iowa State University, Department of Economics Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070. Contact information at EDIRC.
Bibliographic data for series maintained by Curtis Balmer ().

 
Page updated 2020-11-26
Handle: RePEc:isu:genres:35559