IDEAS home Printed from https://ideas.repec.org/a/taf/apmtfi/v29y2022i3p213-226.html
   My bibliography  Save this article

Valuation of European Options Under an Uncertain Market Price of Volatility Risk

Author

Listed:
  • Bartosz Jaroszkowski
  • Max Jensen

Abstract

We propose a model to quantify the effect of parameter uncertainty on the option price in the Heston model. More precisely, we present a Hamilton–Jacobi–Bellman framework which allows us to evaluate best and worst-case scenarios under an uncertain market price of volatility risk. For the numerical approximation, the Hamilton–Jacobi–Bellman equation is reformulated to enable the solution with a finite element method. A case study with butterfly options exhibits how the dependence of Delta on the magnitude of the uncertainty is nonlinear and highly varied across the parameter regime.

Suggested Citation

  • Bartosz Jaroszkowski & Max Jensen, 2022. "Valuation of European Options Under an Uncertain Market Price of Volatility Risk," Applied Mathematical Finance, Taylor & Francis Journals, vol. 29(3), pages 213-226, May.
    • Handle: RePEc:taf:apmtfi:v:29:y:2022:i:3:p:213-226
    DOI: 10.1080/1350486X.2022.2125884
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1080/1350486X.2022.2125884
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1080/1350486X.2022.2125884?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Duy-Minh Dang & Hao Zhou, 2024. "A monotone piecewise constant control integration approach for the two-factor uncertain volatility model," Papers 2402.06840, arXiv.org, revised Feb 2024.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:taf:apmtfi:v:29:y:2022:i:3:p:213-226. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Longhurst (email available below). General contact details of provider: http://www.tandfonline.com/RAMF20 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.