Modelling the Stochastic Dynamics of Volatility for Equity Indices

David Heath, Simon Hurst and Eckhard Platen ()

No 7, Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney

Abstract: The paper is based on the observations that stockk index returns of major equity markets are likely to be Student t distributed. It then develops a class of continuous time stochastic volatility models that is consistent with such empirical findings. Furthermore, applying the criterion of local risk minimisation in an incomplete market setting, option prices are computed. Finally it is shown that implied volatility smile and skew patterns of the type observed in the markets can be recovered from the resulting stochastic volatility model.

Date: 1999-04-01
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Citations: View citations in EconPapers (2)

Published as: Heath, D., Hurst, S. and Platen, E., 2002, "Modelling the Stochastic Dynamics of Volatility for Equity Indicess", Asia-Pacific Financial Markets, 8(3), 179-195.

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Persistent link: https://EconPapers.repec.org/RePEc:uts:rpaper:7

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