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Partial derivative approach for option pricing in a simple stochastic volatility model

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Abstract.

We study a market model in which the volatility of the stock may jump at a random time from a fixed value to another fixed value. This model has already been introduced in the literature. We present a new approach to the problem, based on partial differential equations, which gives a different perspective to the issue. Within our framework we can easily consider several forms for the market price of volatility risk, and interpret their financial meaning. We thus recover solutions previously mentioned in the literature as well as obtaining new ones.

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Authors and Affiliations

  1. Departament de Física Fonamental, Universitat de Barcelona, Diagonal 647, 08028, Barcelona, Spain

    M. Montero

Authors
  1. M. Montero
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Correspondence to M. Montero.

Additional information

Received: 13 May 2004, Published online: 26 November 2004

PACS:

02.30.Jr Partial differential equations - 02.50.Ey Stochastic processes - 02.70.Uu Applications of Monte Carlo methods - 89.65.Gh Economics; econophysics, financial markets, business and management

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Montero, M. Partial derivative approach for option pricing in a simple stochastic volatility model. Eur. Phys. J. B 42, 141–153 (2004). https://doi.org/10.1140/epjb/e2004-00366-7

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  • DOI: https://doi.org/10.1140/epjb/e2004-00366-7

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