Derivative pricing under the possibility of long memory in the supOU stochastic volatility model
We consider the supOU stochastic volatility model which is able to exhibit long-range dependence. For this model we give conditions for the discounted stock price to be a martingale, calculate the characteristic function, give a strip where it is analytic and discuss the use of Fourier pricing techniques. Finally, we present a concrete specification with polynomially decaying autocorrelations and calibrate it to observed market prices of plain vanilla options.
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- Johannes Muhle-Karbe & Oliver Pfaffel & Robert Stelzer, 2010. "Option Pricing in Multivariate Stochastic Volatility Models of OU Type," Papers 1001.3223, arXiv.org, revised Nov 2011.
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