Related papers: Option pricing with fractional volatility
In this paper, a pricing formula for volatility swaps is delivered when the underlying asset follows the stochastic volatility model with jumps and stochastic intensity. By using Feynman-Kac theorem, a partial integral differential equation…
The purpose of this paper is to analyze the problem of option pricing when the short rate follows subdiffusive fractional Merton model. We incorporate the stochastic nature of the short rate in our option valuation model and derive explicit…
Most models for barrier pricing are designed to let a market maker tune the model-implied covariance between moves in the asset spot price and moves in the implied volatility skew. This is often implemented with a local…
The introduction of transaction costs into the theory of option pricing could lead not only to the change of return for options, but also to the change of the volatility. On the base of assumption of the portfolio analysis, a new equation…
This paper proposes a numerical method for pricing foreign exchange (FX) options in a model which deals with stochastic interest rates and stochastic volatility of the FX rate. The model considers four stochastic drivers, each represented…
The aim of this study was to develop methods for evaluating the American-style option prices when the volatility of the underlying asset is described by a stochastic process. As part of this problem were developed techniques for modeling…
The variance gamma model is a widely popular model for option pricing in both academia and industry. In this paper, we provide a new perspective for pricing European style options for the variance gamma model by deriving closed-form…
We present a path integral method to derive closed-form solutions for option prices in a stochastic volatility model. The method is explained in detail for the pricing of a plain vanilla option. The flexibility of our approach is…
There are several approaches to modeling and forecasting time series as applied to prices of commodities and financial assets. One of the approaches is to model the price as a non-stationary time series process with heteroscedastic…
Fractional Brownian motion has become a standard tool to address long-range dependence in financial time series. However, a constant memory parameter is too restrictive to address different market conditions. Here we model the price…
In this paper we provide a comprehensive analysis of a structural model for the dynamics of prices of assets traded in a market originally proposed in [1]. The model takes the form of an interacting generalization of the geometric Brownian…
With some transformations, we convert the problem of option pricing under state-dependent volatility into an initial value problem of the Fokker-Planck equation with a certain potential. By using the Lie symmetry analysis and similarity…
This article presents a generic hybrid numerical method to price a wide range of options on one or several assets, as well as assets with stochastic drift or volatility. In particular for equity and interest rate hybrid with local…
We introduce a tractable multi-currency model with stochastic volatility and correlated stochastic interest rates that takes into account the smile in the FX market and the evolution of yield curves. The pricing of vanilla options on FX…
We present a multivariate stochastic volatility model with leverage, which is flexible enough to recapture the individual dynamics as well as the interdependencies between several assets while still being highly analytically tractable.…
We apply the concepts of utility based pricing and hedging of derivatives in stochastic volatility markets and introduce a new class of "reciprocal affine" models for which the indifference price and optimal hedge portfolio for pure…
After a brief review of option pricing theory, we introduce various methods proposed for extracting the statistical information implicit in options prices. We discuss the advantages and drawbacks of each method, the interpretation of their…
The usage of a spot volatility estimate based on a volatility decomposition in a time-changed price-model according to the trading times is investigated. In this model clock-time volatility splits up into the product of tick-time volatility…
We price European options in a class of models in which the volatility of the underlying risky asset depends on the short rate of interest. Our study results in an explicit pricing formula that depends on knowledge of a characteristic…
In the present paper we present a finite element approach for option pricing in the framework of a well-known stochastic volatility model with jumps, the Bates model. In this model the asset log-returns are assumed to follow a…