Asset pricing with stochastic volatility

DOI10.1007/S002450010018MaRDI QIDQ5929887zbMATH OpenOpenAlexFDO

Authors Gopinath Kallianpur, Jie Xiong

Publication date 13 July 2003

Published in Applied Mathematics and Optimization (Search for Journal in Brave)

Full work available at URL https://doi.org/10.1007/s002450010018

zbMATH Keywords

asset pricingnonlinear filteringstochastic volatility

Mathematics Subject Classification ID

Martingales with continuous parameter (60G44) Stochastic integrals (60H05) Stochastic ordinary differential equations (aspects of stochastic analysis) (60H10) Applications of stochastic analysis (to PDEs, etc.) (60H30) Microeconomic theory (price theory and economic markets) (91B24)

Review text

Let a market consist of a stock \(S_t\) and a bond \(B_t\) governed by the equations \[ dS_t= a(t,S_t)S_tdt+ \sigma_tS_tdw_t \] and \[ dB_t=r_t B_tdt,\;B_0=1, \] where \(r_t\) is a bounded, nonnegative, progressively measurable interest rate process. The volatility \(\sigma_t\) is supposed to be random and satisfying on another stochastic differential equation. The market \((S_t,B_t)\) is shown to be incomplete, and a PDE for the risk-minimizing price of any contingent claim is derived, using its minimal equivalent martingale measure. A similar result for an another model with stochastic volatility was obtained by \textit{G. B. Di Masi}, \textit{Yu. M. Kabanov} and \textit{W. J. Runggaldier} [Theory Probab. Appl. 39, 172-182 (1994; Zbl 0836.60075)]. Next, it is assumed that the \(\sigma_t\) is observed through a process \(Y_t\) subject to random error. A price formula and a PDE are derived regarding the \(S_t\) and the \(Y_t\) as parameters. Finally, \(S_t\) is supposed to be observed. In this case the market is complete, and any contingent claim is priced by an arbitrage argument instead of risk-minimizing.

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Cited in

(14)

• Asset price volatility in a nonconvex general equilibrium model
• Stochastic calculus for assets with non-Gaussian price fluctuations
• On volatility of prices in arbitrage-free markets
• The volatility of asset prices in a stochastic production economy
• Multivariate asset price dynamics with stochastic covariation
• Bond markets with stochastic volatility
• Asymptotic behavior of distribution densities in models with stochastic volatility. I.
• Asset Prices With Regime-Switching Variance Gamma Dynamics
• EQUILIBRIUM STATE PRICES IN A STOCHASTIC VOLATILITY MODEL¹
• Pricing under rough volatility
• Optimal redeeming strategy of stock loans under drift uncertainty
• Volatility and stock prices: Implications from a production model of asset pricing
• Asset pricing with a forward--backward stochastic differential utility
• A filtering approach to tracking volatility from prices observed at random times

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