Simple approximations for option pricing under mean reversion and stochastic volatility (Q1424642): Difference between revisions
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Latest revision as of 16:11, 6 June 2024
scientific article
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English | Simple approximations for option pricing under mean reversion and stochastic volatility |
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Simple approximations for option pricing under mean reversion and stochastic volatility (English)
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16 March 2004
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The author considers two basic market models: (1) a geometric Brownian motion (GBM) commonly used in financial markets models, and (2) mean-reverting (MR) processes used for the description of commodity markets. Problems of stochastic volatility are discussed. Discrete time approximations (AR(1), random walk with drift and GARCH(1,1)) are considered. Simple approximated formulas for option pricing are given for these models. This technique is applied to the pricing of European options on the spot price of electricity in the Scandinavian market NordPool.
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geometric Brownian motion
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mean-reverting process
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GARCH process
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