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

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

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 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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• EFFICIENT, ALMOST EXACT SIMULATION OF THE HESTON STOCHASTIC VOLATILITY MODEL
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Cited In (4)

• 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
• Drift parameter estimation in stochastic differential equation with multiplicative stochastic volatility
• Stochastic differential equations with generalized stochastic volatility and statistical estimators

Uses Software

• Mathematica

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