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Stochastic volatility and the mean reverting process

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  • Sotirios Sabanis

Abstract

This article employs an approach that is an extension of the Hull and White ( 1987 ) model, for pricing European options under the assumption of a mean reverting volatility for the underlying asset. The approach uses a Taylor series expansion method to approximate the price of a European call option in a market with no arbitrage opportunities. The transition to a riskneutral economy is accomplished by introducing an equivalent martingale measure based on the findings of Romano and Touzi ( 1997 ). Numerical results are obtained and compared with similar studies (Lewis, 2000 ). © 2003 Wiley Periodicals, Inc. Jrl Fut Mark 23:33–47, 2003

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  • Sotirios Sabanis, 2003. "Stochastic volatility and the mean reverting process," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 23(1), pages 33-47, January.
    • Handle: RePEc:wly:jfutmk:v:23:y:2003:i:1:p:33-47
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    Cited by:

    1. Lotfaliei, Babak, 2018. "The variance risk premium and capital structure," ESRB Working Paper Series 70, European Systemic Risk Board.
    2. Alibeiki, Hedayat & Lotfaliei, Babak, 2022. "To expand and to abandon: Real options under asset variance risk premium," European Journal of Operational Research, Elsevier, vol. 300(2), pages 771-787.
    3. Sotirios Sabanis & Ying Zhang, 2020. "A fully data-driven approach to minimizing CVaR for portfolio of assets via SGLD with discontinuous updating," Papers 2007.01672, arXiv.org.

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