Stock Evolution under Stochastic Volatility: A Discrete Approach
AbstractThis paper examines the pricing of options by approximating extensions of the Black-Scholes setup in which volatility follows a separate diffusion process. It gereralizes the well-known binomial model, constructing a discrete two-dimensional lattice. We discuss convergence issues extensively and calculate prices and implied volatilities for European- and American-style put options.
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Bibliographic InfoPaper provided by University of Bonn, Germany in its series Discussion Paper Serie B with number 407.
Length: 16 pages
Date of creation:
Date of revision: May 1999
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Postal: Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany
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binomial model; option valuation; lattice approach; stochastic volatility;
Find related papers by JEL classification:
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
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- J. Michael Harrison & Stanley R. Pliska, 1981. "Martingales and Stochastic Integrals in the Theory of Continous Trading," Discussion Papers 454, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- N. Hofmann & E. Platen & M. Schweizer, 1992.
"Option Pricing under Incompleteness and Stochastic Volatility,"
Discussion Paper Serie B
209, University of Bonn, Germany.
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- 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.
- Duan, Jin-Chuan & Simonato, Jean-Guy, 2001. "American option pricing under GARCH by a Markov chain approximation," Journal of Economic Dynamics and Control, Elsevier, vol. 25(11), pages 1689-1718, November.
- Stein, Elias M & Stein, Jeremy C, 1991. "Stock Price Distributions with Stochastic Volatility: An Analytic Approach," Review of Financial Studies, Society for Financial Studies, vol. 4(4), pages 727-52.
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