European option pricing with stochastic volatility models under parameter uncertainty
From MaRDI portal
Abstract: We consider stochastic volatility models under parameter uncertainty and investigate how model derived prices of European options are affected. We let the pricing parameters evolve dynamically in time within a specified region, and formalise the problem as a control problem where the control acts on the parameters to maximise/minimise the option value. Through a dual representation with backward stochastic differential equations, we obtain explicit equations for Heston's model and investigate several numerical solutions thereof. In an empirical study, we apply our results to market data from the S&P 500 index where the model is estimated to historical asset prices. We find that the conservative model-prices cover 98% of the considered market-prices for a set of European call options.
Recommendations
- Valuation of European Options Under an Uncertain Market Price of Volatility Risk
- Option price sensitivity to errors in stochastic dynamics modeling
- Uncertain Parameters, an Empirical Stochastic Volatility Model and Confidence Limits
- Bounds on European option prices under stochastic volatility
- Stochastic volatility models with application in option pricing
Cites work
- A closed-form solution for options with stochastic volatility with applications to bond and currency options
- A forward scheme for backward SDEs
- A Generalized dynamic programming principle and hamilton-jacobi-bellman equation
- A new approach for option pricing under stochastic volatility
- A regression-based Monte Carlo method to solve backward stochastic differential equations
- A theory of the term structure of interest rates
- Affine diffusions and related processes: simulation, theory and applications
- An intertemporal asset pricing model with stochastic consumption and investment opportunities
- Asymptotic properties of maximum-likelihood estimators for Heston models based on continuous time observations
- Asymptotic theory for non-linear least squares estimator for diffusion processes
- Backward Stochastic Differential Equations in Finance
- Bayesian analysis of contingent claim model error
- Discrete-time approximation and Monte-Carlo simulation of backward stochastic differential equations
- Discrete-time approximation of decoupled Forward-Backward SDE with jumps
- Dynamic Programming and Pricing of Contingent Claims in an Incomplete Market
- Estimation of an Ergodic Diffusion from Discrete Observations
- Existence of Optimal Strategies Based on Specified Information, for a Class of Stochastic Decision Problems
- Financial Modelling with Jump Processes
- scientific article; zbMATH DE number 54145 (Why is no real title available?)
- scientific article; zbMATH DE number 1066316 (Why is no real title available?)
- Linear regression MDP scheme for discrete backward stochastic differential equations under general conditions
- Managing the volatility risk of portfolios of derivative securities: the Lagrangian uncertain volatility model
- Martingale estimation functions for discretely observed diffusion processes
- Model risk and uncertainty -- illustrated with examples from mathematical finance
- On Certain Questions in the Theory of Optimal Control
- On changes of measure in stochastic volatility models
- On Filippov's Implicit Functions Lemma
- Option pricing under model and parameter uncertainty using predictive densities
- Pricing and hedging derivative securities in markets with uncertain volatilities
- Quasi-Likelihood and Optimal Estimation, Correspondent Paper
- Realized Volatility
- Reducing variance in the numerical solution of BSDEs
- Stochastic calculus and applications
- Stochastic Volatility for Lévy Processes
- Stock price distributions with stochastic volatility: an analytic approach
- Testing Statistical Hypotheses
- The pricing of options and corporate liabilities
- The pricing of options on assets with stochastic volatilities
- The relaxed investor and parameter uncertainty
- Two singular diffusion problems
- Uncertain volatility and the risk-free synthesis of derivatives
- Weighted least-squares estimation for the subcritical Heston process
Cited in
(25)- Valuation of European option under uncertain volatility model
- European option pricing model with generalized Ornstein-Uhlenbeck process under stochastic earning yield and stochastic dividend yield
- Uncertainty quantification and Heston model
- European option pricing under fuzzy CEV model
- Bounds on European option prices under stochastic volatility
- scientific article; zbMATH DE number 6719886 (Why is no real title available?)
- scientific article; zbMATH DE number 6612856 (Why is no real title available?)
- Uncertain Parameters, an Empirical Stochastic Volatility Model and Confidence Limits
- A Behavioural Approach to the Pricing of European Options
- Implicit-Explicit Schemes for European Option Pricing with Liquidity Shocks
- A reduced PDE method for European option pricing under multi-scale, multi-factor stochastic volatility
- Computation of the effects of uncertainty in volatility on option pricing and hedging
- Option price sensitivity to errors in stochastic dynamics modeling
- Robust deep hedging
- Option pricing via maximization over uncertainty and correction of volatility smile
- AN ANALYTICAL APPROXIMATION FOR EUROPEAN OPTION PRICES UNDER STOCHASTIC INTEREST RATES
- EUROPEAN OPTION PRICING WITH LIQUIDITY SHOCKS
- Valuation of European Options Under an Uncertain Market Price of Volatility Risk
- Deep signature FBSDE algorithm
- A spectral element approximation to price European options with one asset and stochastic volatility
- Robust Hedging GANs: Towards Automated Robustification of Hedging Strategies
- A simple framework for the stochastic volatility uncertainty
- An efficient computational method for solving the fractional form of the European option price PDE with transaction cost under the fractional Heston model
- Leveraging machine learning for high-dimensional option pricing within the uncertain volatility model
- Valuation of American options in ambiguous multifactor models
This page was built for publication: European option pricing with stochastic volatility models under parameter uncertainty
Report a bug (only for logged in users!)Click here to report a bug for this page (MaRDI item Q5038294)
