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Stochastic Volatility and Option Pricing in the Brazilian Stock Marke

2005; SAGE Publishing; Volume: 4; Issue: 2 Linguagem: Inglês

10.1177/097265270500400204

0973-0710

Caio Almeida, Samy Dana,

Financial Risk and Volatility Modeling

The stochastic volatility model (SVPS) proposed by Fouque et al. (2000a) explores a rapid timescale fluctuation of the volatility process to end up with a parsimonious way of capturing the volatility smile implied by close to the money options. In this article we test the SVFPS model using options from a Brazilian telecommunications stock. First, we find evidence of fast mean reversion in the volatility process. In addition, to test the model's ability to price options not so close to the money, we extend its statistical estimators to consider, in the calibration process, a wider region for the options moneyness. As an illustration, we price an exotic option.