Time-changed fast mean-reverting stochastic volatility models

DOI10.1142/S0219024911006875MaRDI QIDQ3225033zbMATH OpenFDO

Authors Matthew Lorig

Publication date 13 March 2012

Published in International Journal of Theoretical and Applied Finance (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1010.5203

zbMATH Keywords

multiscalestochastic volatilityimplied volatilityjump-diffusionLévy subordinatorstochastic time-change

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Financial applications of other theories (91G80)

Abstract: We introduce a class of randomly time-changed fast mean-reverting stochastic volatility models and, using spectral theory and singular perturbation techniques, we derive an approximation for the prices of European options in this setting. Three examples of random time-changes are provided and the implied volatility surfaces induced by these time-changes are examined as a function of the model parameters. Three key features of our framework are that we are able to incorporate jumps into the price process of the underlying asset, allow for the leverage effect, and accommodate multiple factors of volatility, which operate on different time-scales.

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Cited in

(6)

• Stochastic Volatility Model with Time‐dependent Skew
• CONSTANT ELASTICITY OF VARIANCE IN RANDOM TIME: A NEW STOCHASTIC VOLATILITY MODEL WITH PATH DEPENDENCE AND LEVERAGE EFFECT
• Multivariate subordination of Markov processes with financial applications
• scientific article; zbMATH DE number 6961166 (Why is no real title available?)
• From calendar time to business time: the case of commodity markets
• Positive eigenfunctions of Markovian pricing operators: Hansen-Scheinkman factorization, Ross recovery, and long-term pricing

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