Time-changed fast mean-reverting stochastic volatility models

DOI10.1142/S0219024911006875zbMATH Open1233.91285arXiv1010.5203MaRDI QIDQ3225033FDOQ3225033

Authors: Matthew Lorig 

Publication date: 13 March 2012

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

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.

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

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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)

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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
• Title not available (Why is that?)
• 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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