A Mean-Reverting Stochastic Volatility Option-Pricing Model with an Analytic Solution
Author | : Henrik Andersson |
Publisher | : |
Total Pages | : 45 |
Release | : 2002 |
ISBN-10 | : OCLC:1290398941 |
ISBN-13 | : |
Rating | : 4/5 ( Downloads) |
Download or read book A Mean-Reverting Stochastic Volatility Option-Pricing Model with an Analytic Solution written by Henrik Andersson and published by . This book was released on 2002 with total page 45 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this paper we derive a closed form approximation to a stochastic volatility option-pricing model and propose a variant of EGARCH for parameter estimation. The model thereby provides a consistent approach to the problem of option pricing and parameter estimation. Using Swedish stocks, the model provides a good fit to the heteroscedasticity prevalent in the time-series. The stochastic volatility model also prices options on the underlying stock more accurately than the traditional Black-Scholes formula. This result holds for both historic and implied volatility. A large part of the volatility smile that is observed for options of different maturity and exercise prices is thereby explained.