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Option Pricing in Stochastic Volatility Models of the Ornstein‐Uhlenbeck type
Author(s) -
Nicolato Elisa,
Venardos Emmanouil
Publication year - 2003
Publication title -
mathematical finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.98
H-Index - 81
eISSN - 1467-9965
pISSN - 0960-1627
DOI - 10.1111/1467-9965.t01-1-00175
Subject(s) - stylized fact , stochastic volatility , ornstein–uhlenbeck process , econometrics , economics , volatility (finance) , martingale (probability theory) , derivative (finance) , martingale pricing , financial economics , mathematics , stochastic process , local martingale , statistics , macroeconomics
Stochastic volatility models of the Ornstein‐Uhlenbeck type possess authentic capability of capturing some stylized features of financial time series. In this work we investigate this class of models from the viewpoint of derivative asset analysis. We discuss topics related to the incompleteness of this type of markets. In particular, for structure preserving martingale measures, we derive the price of simple European‐style contracts in closed form. Furthermore, the range of viable prices is determined and an empirical application is presented.