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Option pricing with stochastic volatility models

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  • Stefano Herzel

Abstract

A general class of models for derivative pricing with stochastic volatility is analyzed. We include the possibility of jumps for the paths of the asset's price and for those of its volatility. We also consider the case of correlation between the process of the asset's price and that of its volatility. In this way we are able to give a unifying view on most of the models studied in the literature. We will examine theoretical issues related to the market price of volatility risk, the equivalent martingale measures and the possibility of obtaining a numerically tractable formula for contingent claim pricing. Finally, we propose some methodologies to test the behavior of stochastic volatility models when applied to market data.

Suggested Citation

  • Stefano Herzel, 2000. "Option pricing with stochastic volatility models," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 23(2), pages 75-99.
    • Handle: RePEc:spr:decfin:v:23:y:2000:i:2:p:75-99
    Note: Received: 8 July 1999
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    Cited by:

    1. Chilarescu, Constantin & Viasu, Iana Luciana, 2011. "Phénomènes financiers et mélange de lois : Une nouvelle méthode d’estimation des paramètres," MPRA Paper 33909, University Library of Munich, Germany.

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