Option Pricing under Incompleteness and Stochastic Volatility
AbstractWe consider a very general diffusion model for asset prices which allows the description of stochastic and past-dependent volatilities. Since this model typically yields an incomplete market, we show that for the purpose of pricing options, a small investor should use the minimal equivalent martingale measure associated to the underlying stock price process. Then we present stochastic numerical methods permitting the explicit computation of option prices and hedging strategies, and we illustrate our approach by specific examples.
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Bibliographic InfoPaper provided by University of Bonn, Germany in its series Discussion Paper Serie B with number 209.
Length: 49 pages
Date of creation: Feb 1992
Date of revision:
Contact details of provider:
Postal: Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany
Fax: +49 228 73 6884
Web page: http://www.bgse.uni-bonn.de/index.php?id=517
ption pricing; stochastic volatility; incomplete markets; equivalent martingale measures; stochastic numerical methods;
Other versions of this item:
- Norbert Hofmann & Eckhard Platen & Martin Schweizer, 1992. "Option Pricing Under Incompleteness and Stochastic Volatility," Mathematical Finance, Wiley Blackwell, vol. 2(3), pages 153-187.
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