A general decomposition formula for derivative prices in stochastic volatility models

Elisa Alòs ()
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Elisa Alòs: https://www.upf.edu/web/econ/faculty/-/asset_publisher/6aWmmXf28uXT/persona/id/3418685

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: We see that the price of an european call option in a stochastic volatility framework can be decomposed in the sum of four terms, which identify the main features of the market that affect to option prices: the expected future volatility, the correlation between the volatility and the noise driving the stock prices, the market price of volatility risk and the difference of the expected future volatility at different times. We also study some applications of this decomposition.

Keywords: Continuous-time option pricing model; stochastic volatility; Ito's formula; incomplete markets (search for similar items in EconPapers)
JEL-codes: G13 (search for similar items in EconPapers)
Date: 2003-02
New Economics Papers: this item is included in nep-fin
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Citations: View citations in EconPapers (1)

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