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Pricing turbo warrants under stochastic elasticity of variance

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  • Yoon, Ji-Hun
  • Park, Chang-Rae

Abstract

We consider an extended constant elasticity of variance (CEV) model in which the elasticity follows a stochastic process driven by a fast mean-reverting Ornstein–Uhlenbeck process. Then, we use the proposed model to examine a turbo warrant option, which is a type of exotic option. Based on an asymptotic analysis, we derive the partial differential equation of the leading and the corrected terms, which we use to determine the analytic formula for the turbo warrant call option. The parameter analysis using the extended CEV model provides us with a better understanding of the price structure of a turbo warrant call. Moreover, by comparing the turbo warrant call with a European vanilla call, we can examine the sensitivity of options with respect to the model parameters.

Suggested Citation

  • Yoon, Ji-Hun & Park, Chang-Rae, 2016. "Pricing turbo warrants under stochastic elasticity of variance," Chaos, Solitons & Fractals, Elsevier, vol. 88(C), pages 107-118.
    • Handle: RePEc:eee:chsofr:v:88:y:2016:i:c:p:107-118
    DOI: 10.1016/j.chaos.2015.11.043
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    References listed on IDEAS

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    1. Sun-Yong Choi & Jean-Pierre Fouque & Jeong-Hoon Kim, 2013. "Option pricing under hybrid stochastic and local volatility," Quantitative Finance, Taylor & Francis Journals, vol. 13(8), pages 1157-1165, July.
    2. Cox, John C. & Ross, Stephen A., 1976. "The valuation of options for alternative stochastic processes," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 145-166.
    3. Min-Ku Lee & Ji-Hun Yoon & Jeong-Hoon Kim & Sun-Hwa Cho, 2014. "Turbo Warrants under Hybrid Stochastic and Local Volatility," Abstract and Applied Analysis, Hindawi, vol. 2014, pages 1-10, January.
    4. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    5. Hoi Ying Wong & Chun Man Chan, 2008. "Turbo warrants under stochastic volatility," Quantitative Finance, Taylor & Francis Journals, vol. 8(7), pages 739-751.
    6. Yoon, Ji-Hun, 2015. "Pricing perpetual American options under multiscale stochastic elasticity of variance," Chaos, Solitons & Fractals, Elsevier, vol. 70(C), pages 14-26.
    7. Kim, Jeong-Hoon & Yoon, Ji-Hun & Lee, Jungwoo & Choi, Sun-Yong, 2015. "On the stochastic elasticity of variance diffusions," Economic Modelling, Elsevier, vol. 51(C), pages 263-268.
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    Cited by:

    1. Duarte Queirós, Sílvio M. & Anteneodo, Celia, 2016. "Complexity in quantitative finance and economics," Chaos, Solitons & Fractals, Elsevier, vol. 88(C), pages 1-2.
    2. Sun-Yong Choi & Sotheara Veng & Jeong-Hoon Kim & Ji-Hun Yoon, 2022. "A Mellin Transform Approach to the Pricing of Options with Default Risk," Computational Economics, Springer;Society for Computational Economics, vol. 59(3), pages 1113-1134, March.

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