General approximation schemes for option prices in stochastic volatility models
In this paper we develop a general method for deriving closed-form approximations of European option prices and equivalent implied volatilities in stochastic volatility models. Our method relies on perturbations of the model dynamics and we show how the expansion terms can be calculated using purely probabilistic methods. A flexible way of approximating the equivalent implied volatility from the basic price expansion is also introduced. As an application of our method we derive closed-form approximations for call prices and implied volatilities in the Heston [ Rev. Financial Stud. , 1993, 6 , 327--343] model. The accuracy of these approximations is studied and compared with numerically obtained values.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 12 (2012)
Issue (Month): 6 (April)
|Contact details of provider:|| Web page: http://www.tandfonline.com/RQUF20|
|Order Information:||Web: http://www.tandfonline.com/pricing/journal/RQUF20|
When requesting a correction, please mention this item's handle: RePEc:taf:quantf:v:12:y:2012:i:6:p:873-891. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Michael McNulty)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.