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General approximation schemes for option prices in stochastic volatility models

In English

Författare

  • Karl Larsson

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.

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