General approximation schemes for option prices in stochastic volatility models
Författare
Summary, in English
In this paper we develop a general method for deriving closed-form approximations of European option prices and equivalent implied volatilities in stochastic volatility models. Our method relies on perturbations of the model dynamics and we show how the expansion terms can be calculated using purely probabilistic methods. A flexible way of approximating the equivalent implied volatility from the basic price expansion is also introduced. As an application of our method we derive closed-form approximations for call prices and implied volatilities in the Heston [Rev. Financial Stud., 1993, 6, 327-343] model. The accuracy of these approximations is studied and compared with numerically obtained values.
Avdelning/ar
Publiceringsår
2012
Språk
Engelska
Sidor
873-891
Publikation/Tidskrift/Serie
Quantitative Finance
Volym
12
Issue
6
Dokumenttyp
Artikel i tidskrift
Förlag
Taylor & Francis
Ämne
- Economics
Nyckelord
- Applied mathematical finance
- Stochastic volatility
- Option pricing
- Stochastic applications
Status
Published
ISBN/ISSN/Övrigt
- ISSN: 1469-7696