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Analytical Comparisons of Option prices in Stochastic Volatility Models

Vicky Henderson

OFRC Working Papers Series from Oxford Financial Research Centre

Abstract: This paper orders option prices under various well known martingale measures in an incomplete stochastic volatility model. The central result is a comparison theorem which proves convex option prices are decreasing in the market price of volatility risk, the parameter governing the choice of pricing measure. The theorem is applied to order option prices under the minimal martingale, q-optimal and minimal entropy measures. This ordering depends on the mean variance tradeoff process whilst the specifics of the volatility dynamics are not important. We illustrate our results by analyzing the Hull and White, Heston and Stein and Stein models.

New Economics Papers: this item is included in nep-ets, nep-fin, nep-fmk and nep-rmg
Date: 2002
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