A Market Model for Stochastic Implied Volatility
AbstractIn this paper a stochastic volatility model is presented that directly prescribes the stochastic development of the implied Black-Scholes volatilities of a set of given standard options. Thus the model is able to capture the stochastic movements of a full term structure of implied volatilities. The conditions are derived that have to be satisfied to ensure absence of arbitrage in the model and its numerical implementation is discussed.
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Bibliographic InfoPaper provided by University of Bonn, Germany in its series Discussion Paper Serie B with number 453.
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Date of revision: May 1999
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option pricing; stochastic volatility; implied volatility;
Find related papers by JEL classification:
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
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