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The Britten-Jones And Neuberger Smile-Consistent With Stochastic Volatility Option Pricing Model: A Further Analysis

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  • ALESSANDRO ROSSI

    (Institute for the Protection and Security of the Citizen (IPSC), European Commission, Joint Research Centre, Ispra (VA), Italy)

Abstract

In part of the recent financial literature, exotic option pricing models have been built by establishing a link with European-style options. All these models share the characteristic of being consistent with the observed market smile. They differ respect to the specification of the volatility process. This paper provides a deeper insight into the Britten-Jones and Neuberger (1999) smile-consistent no arbitrage with stochastic volatility option pricing model. Their approach is similar, in spirit, to that one of Derman and Kani (1997), but the implementation is simpler and faster. We explain the main features of the model by performing a set of exercises. In addition we propose some extensions of the model, which make it more flexible.

Suggested Citation

  • Alessandro Rossi, 2002. "The Britten-Jones And Neuberger Smile-Consistent With Stochastic Volatility Option Pricing Model: A Further Analysis," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 5(01), pages 1-31.
    • Handle: RePEc:wsi:ijtafx:v:05:y:2002:i:01:n:s0219024902001286
    DOI: 10.1142/S0219024902001286
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    Cited by:

    1. Rossi, Alessandro & Gallo, Giampiero M., 2006. "Volatility estimation via hidden Markov models," Journal of Empirical Finance, Elsevier, vol. 13(2), pages 203-230, March.

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