Pricing the European call option in the model with stochastic volatility driven by Ornstein-Uhlenbeck process. Exact formulas

DOI10.15559/15-VMSTA36CNFzbMATH Open1403.91345arXiv1510.01848MaRDI QIDQ340779FDOQ340779

Yuliya S. Mishura, Sergii Kuchuk-Iatsenko

Publication date: 15 November 2016

Published in: Modern Stochastics. Theory and Applications (Search for Journal in Brave)

Abstract: We consider the Black--Scholes model of financial market modified to capture the stochastic nature of volatility observed at real financial markets. For volatility driven by the Ornstein--Uhlenbeck process, we establish the existence of equivalent martingale measure in the market model. The option is priced with respect to the minimal martingale measure for the case of uncorrelated processes of volatility and asset price, and an analytic expression for the price of European call option is derived. We use the inverse Fourier transform of a characteristic function and the Gaussian property of the Ornstein--Uhlenbeck process.

Full work available at URL: https://arxiv.org/abs/1510.01848

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zbMATH Keywords

option pricingOrnstein-Uhlenbeck processstochastic volatilityfinancial marketsEuropean call option

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Diffusion processes (60J60) Stochastic ordinary differential equations (aspects of stochastic analysis) (60H10) Martingales with continuous parameter (60G44)

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Cited In (11)

• Stochastic Volatility With an Ornstein–Uhlenbeck Process: An Extension
• European option pricing model with generalized Ornstein-Uhlenbeck process under stochastic earning yield and stochastic dividend yield
• An application of the Malliavin calculus for calculating the precise and approximate prices of options with stochastic volatility
• Fractional Cox-Ingersoll-Ross process with small Hurst indices
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• Option pricing in the model with stochastic volatility driven by Ornstein-Uhlenbeck process. Simulation
• Stochastic representation and path properties of a fractional Cox–Ingersoll–Ross process
• Drift parameter estimation in stochastic differential equation with multiplicative stochastic volatility
• Option pricing with fractional stochastic volatility and discontinuous payoff function of polynomial growth
• Stochastic differential equations with generalized stochastic volatility and statistical estimators
• Option Pricing in Stochastic Volatility Models of the Ornstein‐Uhlenbeck type

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