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Uncertain Parameters, an Empirical Stochastic Volatility Model and Confidence Limits

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  • A. Oztukel
  • P. Wilmott

Abstract

In this paper we build upon the recently developed uncertain parameter framework for valuing derivatives in a worst-case scenario. We start by deriving a stochastic volatility model based on a simple analysis of time-series data. We use this stochastic model to examine the time evolution of volatility from an initial known value to a steady-state distribution in the long run. This empirical model is then incorporated into the uncertain parameter option valuation framework to provide 'confidence limits' for the option value.

Suggested Citation

  • A. Oztukel & P. Wilmott, 1999. "Uncertain Parameters, an Empirical Stochastic Volatility Model and Confidence Limits," OFRC Working Papers Series 1999mf19, Oxford Financial Research Centre.
    • Handle: RePEc:sbs:wpsefe:1999mf19
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    File URL: http://www.finance.ox.ac.uk/file_links/finecon_papers/1999mf19.pdf
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