Option pricing in the model with stochastic volatility driven by Ornstein-Uhlenbeck process. Simulation

DOI10.15559/15-VMSTA43zbMATH Open1403.91346arXiv1601.01128MaRDI QIDQ340795FDOQ340795

Authors: Sergii Kuchuk-Iatsenko, Yuliya S. Mishura 

Publication date: 15 November 2016

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

Abstract: We consider a discrete-time approximation of paths of an Ornstein--Uhlenbeck process as a mean for estimation of a price of European call option in the model of financial market with stochastic volatility. The Euler--Maruyama approximation scheme is implemented. We determine the estimates for the option price for predetermined sets of parameters. The rate of convergence of the price and an average volatility when discretization intervals tighten are determined. Discretization precision is analyzed for the case where the exact value of the price can be derived.

Full work available at URL: https://arxiv.org/abs/1601.01128

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zbMATH Keywords

option pricingOrnstein-Uhlenbeck processstochastic volatilityEuler-Maruyama schemefinancial marketsdiscrete-time approximation

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Numerical methods (including Monte Carlo methods) (91G60) Stochastic ordinary differential equations (aspects of stochastic analysis) (60H10) Martingales with continuous parameter (60G44) Computational methods for stochastic equations (aspects of stochastic analysis) (60H35)

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Cited In (13)

• The rate of convergence of option prices on the asset following a geometric Ornstein-Uhlenbeck process
• European call option pricing under reflected Vasicek-Ornstein-Uhlenbeck model
• DG framework for pricing European options under one-factor stochastic volatility models
• An application of the Malliavin calculus for calculating the precise and approximate prices of options with stochastic volatility
• Option pricing under Ornstein-Uhlenbeck stochastic volatility: a linear model
• Moderate deviations for Euler-Maruyama approximation of Hull-White stochastic volatility model
• Pricing the European call option in the model with stochastic volatility driven by Ornstein-Uhlenbeck process. Exact formulas
• Rate of convergence of option prices for approximations of the geometric Ornstein-Uhlenbeck process by Bernoulli jumps of prices on assets
• Drift parameter estimation in stochastic differential equation with multiplicative stochastic volatility
• Asymptotics for the Euler-discretized Hull-White stochastic volatility model
• Stochastic differential equations with generalized stochastic volatility and statistical estimators
• Exact simulation of the Ornstein-Uhlenbeck driven stochastic volatility model
• Option pricing under stochastic volatility: the exponential Ornstein-Uhlenbeck model

Uses Software

• Mathematica

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