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Option Pricing in Stochastic Volatility Models of the Ornstein‐Uhlenbeck type

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  • Elisa Nicolato
  • Emmanouil Venardos

Abstract

Stochastic volatility models of the Ornstein‐Uhlenbeck type possess authentic capability of capturing some stylized features of financial time series. In this work we investigate this class of models from the viewpoint of derivative asset analysis. We discuss topics related to the incompleteness of this type of markets. In particular, for structure preserving martingale measures, we derive the price of simple European‐style contracts in closed form. Furthermore, the range of viable prices is determined and an empirical application is presented.

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  • Elisa Nicolato & Emmanouil Venardos, 2003. "Option Pricing in Stochastic Volatility Models of the Ornstein‐Uhlenbeck type," Mathematical Finance, Wiley Blackwell, vol. 13(4), pages 445-466, October.
    • Handle: RePEc:bla:mathfi:v:13:y:2003:i:4:p:445-466
    DOI: 10.1111/1467-9965.t01-1-00175
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