Open AccessAn analytical approximation formula for European option prices under a liquidity-adjusted non-affine stochastic volatility model
Author(s) -
Shoude Huang,
XinJiang He
Publication year - 2022
Publication title -
aims mathematics
Language(s) - English
Resource type - Journals
ISSN - 2473-6988
DOI - 10.3934/math.2022577
Subject(s) - affine transformation , stochastic volatility , market liquidity , volatility (finance) , valuation of options , economics , call option , econometrics , implied volatility , mathematics , mathematical economics , finance , pure mathematics
In this paper, we investigate the pricing of European options under a liquidity-adjusted non-affine stochastic volatility model. An analytical European option pricing formula is successfully derived with the COS method, based on an approximation for the characteristic function of the underlying log-asset price. Numerical analysis reveals that our results are very efficient and of reasonable accuracy, and we also present some sensitivity analysis to demonstrate the effects of different parameters on option prices.