Moment explosions in stochastic volatility models (Q2463702)

The authors consider a class of stochastic volatility models that are presented in terms of vector stochastic differential equations with correlated Brownian motions and power volatility coefficient. It is shown that the models based on log-normal or displaced-diffusion volatility specifications can exhibit moment explosions with fairly typical values of parameters but the CEV(constant elasticity variance)-based models are free of such problems. The behaviour of the Heston model, where the power coefficient is 1/2, is studied and a description of circumstances under which this model produces stable moments is provided. It is demonstrated that under the conditions of absence of moment stability the reasonably parameterised models can produce infinite prices for Eurodollar futures and for some swaps with floating legs.