Stock Evolution under Stochastic Volatility: A Discrete Approach

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Stock Evolution under Stochastic Volatility: A Discrete Approach

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Leisen, Dietmar P.J.

Abstract

This 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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Paper provided by University of Bonn, Germany in its series Discussion Paper Serie B with number 407.

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Length: 16 pages
Date of creation:
Date of revision: May 1999
Handle: RePEc:bon:bonsfb:407

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Postal: Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany
Fax: +49 228 73 9221
Web page: http://www.bgse.uni-bonn.de/index.php?id=517

For technical questions regarding this item, or to correct its listing, contact: (Daniel Park).

Find related papers by JEL classification:
G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

This paper has been announced in the following NEP Reports:

NEP-ALL-2000-02-07 (All new papers)
NEP-FIN-2000-02-07 (Finance)

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

Stein, Elias M & Stein, Jeremy C, 1991. "Stock Price Distributions with Stochastic Volatility: An Analytic Approach," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 4(4), pages 727-52. [Downloadable!] (restricted)
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. [Downloadable!] (restricted)
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. [Downloadable!] (restricted)
N. Hofmann & E. Platen & M. Schweizer, 1992. "Option Pricing under Incompleteness and Stochastic Volatility," Discussion Paper Serie B 209, University of Bonn, Germany.
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. [Downloadable!]

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