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Non-constant volatility models a comparison

Author

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  • Paolo Foschi

    (Univ. of Bologna)

Abstract

Option pricing model with non-constant volatility models are compared to stochastic volatility ones. The non-constant volatility models considered are the Dupire's local volatility and Hobson and Rogers path-dependent volatility models. These approaches have the theoretical advantage of preserving the completeness of the market. The stochastic volatility models discussed are the Heston stochastic volatility and the SABR models. Because of their two-factor nature these models are notably flexible. The performances of the models are compared by considering their fit to the term structure of implied volatility, their robustness on the hedging and pricing of vanilla and exotic options.

Suggested Citation

  • Paolo Foschi, 2006. "Non-constant volatility models a comparison," Computing in Economics and Finance 2006 344, Society for Computational Economics.
  • Handle: RePEc:sce:scecfa:344
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    More about this item

    Keywords

    Stochastic volatility; option pricing; calibration; exotic options;

    JEL classification:

    • C00 - Mathematical and Quantitative Methods - - General - - - General
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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