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The $\alpha$-Hypergeometric Stochastic Volatility Model

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  • Jos'e Da Fonseca
  • Claude Martini

Abstract

The aim of this work is to introduce a new stochastic volatility model for equity derivatives. To overcome some of the well-known problems of the Heston model, and more generally of the affine models, we define a new specification for the dynamics of the stock and its volatility. Within this framework we develop all the key elements to perform the pricing of vanilla European options as well as of volatility derivatives. We clarify the conditions under which the stock price is a martingale and illustrate how the model can be implemented.

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  • Jos'e Da Fonseca & Claude Martini, 2014. "The $\alpha$-Hypergeometric Stochastic Volatility Model," Papers 1409.5142, arXiv.org.
    • Handle: RePEc:arx:papers:1409.5142
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    1. Yuri Kabanov & Robert Liptser, 2006. "From Stochastic Calculus to Mathematical Finance. The Shiryaev Festschrift," Post-Print hal-00488295, HAL.
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    5. Chesney, Marc & Scott, Louis, 1989. "Pricing European Currency Options: A Comparison of the Modified Black-Scholes Model and a Random Variance Model," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 24(3), pages 267-284, September.
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    7. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    8. Hull, John C & White, Alan D, 1987. "The Pricing of Options on Assets with Stochastic Volatilities," Journal of Finance, American Finance Association, vol. 42(2), pages 281-300, June.
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