Stochastic Volatility With an Ornstein–Uhlenbeck Process: An Extension
1999; Oxford University Press; Volume: 3; Issue: 1 Linguagem: Inglês
10.1023/a
ISSN1875-824X
Autores Tópico(s)Complex Systems and Time Series Analysis
ResumoIn this paper, we reexamine and extend the stochastic volatility model of Stein and Stein (S&S) (1991) where volatility follows a mean–reverting Ornstein–Uhlenbeck process. Using Fourier inversion techniques we are able to allow for correlation between instantaneous volatilities and the underlying stock returns. A closed-form pricing solution for European options is derived and some numerical examples are given. In addition, we discuss the boundary behaviour of the instantaneous volatility at v(t) = 0 and show that S&S do not work with an absolute value process of volatility. JEL Classification: G13
Referência(s)