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Option Price Decomposition in Spot-Dependent Volatility Models and Some Applications

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  • Raúl Merino
  • Josep Vives

Abstract

We obtain a Hull and White type option price decomposition for a general local volatility model. We apply the obtained formula to CEV model. As an application we give an approximated closed formula for the call option price under a CEV model and an approximated short term implied volatility surface. These approximated formulas are used to estimate model parameters. Numerical comparison is performed for our new method with exact and approximated formulas existing in the literature.

Suggested Citation

  • Raúl Merino & Josep Vives, 2017. "Option Price Decomposition in Spot-Dependent Volatility Models and Some Applications," International Journal of Stochastic Analysis, Hindawi, vol. 2017, pages 1-16, July.
    • Handle: RePEc:hin:jnijsa:8019498
    DOI: 10.1155/2017/8019498
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    Cited by:

    1. El-Khatib, Youssef & Goutte, Stephane & Makumbe, Zororo S. & Vives, Josep, 2022. "Approximate pricing formula to capture leverage effect and stochastic volatility of a financial asset," Finance Research Letters, Elsevier, vol. 44(C).
    2. Takuji Arai, 2021. "Approximate option pricing formula for Barndorff-Nielsen and Shephard model," Papers 2104.10877, arXiv.org.
    3. Takuji Arai, 2020. "Al\`os type decomposition formula for Barndorff-Nielsen and Shephard model," Papers 2005.07393, arXiv.org, revised Sep 2020.
    4. R. Merino & J. Pospíšil & T. Sobotka & J. Vives, 2018. "Decomposition Formula For Jump Diffusion Models," Journal of Enterprising Culture (JEC), World Scientific Publishing Co. Pte. Ltd., vol. 21(08), pages 1-36, December.
    5. Raul Merino & Jan Posp'iv{s}il & Tom'av{s} Sobotka & Josep Vives, 2019. "Decomposition formula for jump diffusion models," Papers 1906.06930, arXiv.org.

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