European Option Pricing with Stochastic Volatility Models Under Parameter Uncertainty
Research output: Chapter in Book/Report/Conference proceeding › Article in proceedings › Research › peer-review
We consider stochastic volatility models under parameter uncertainty and investigate how model derived prices of European options are affected. We let the pricing parameters evolve dynamically in time within a specified region, and formalise the problem as a control problem where the control acts on the parameters to maximise/minimise the option value. Through a dual representation with backward stochastic differential equations, we obtain explicit equations for Heston’s model and investigate several numerical solutions thereof. In an empirical study, we apply our results to market data from the S&P 500 index where the model is estimated to historical asset prices. We find that the conservative model-prices cover 98% of the considered market-prices for a set of European call options.
Original language | English |
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Title of host publication | Frontiers in Stochastic Analysis - BSDEs, SPDEs and their Applications : Selected, Revised and Extended Contributions |
Editors | Samuel N. Cohen, István Gyöngy, Gon?alo dos Reis, David Siska, Lukasz Szpruch |
Number of pages | 45 |
Publisher | Springer |
Publication date | 2019 |
Pages | 123-167 |
ISBN (Print) | 9783030222840 |
DOIs | |
Publication status | Published - 2019 |
Event | International Workshop on BSDEs, SPDEs and their Applications, BSDE-SPDE 2017 - Edinburgh, United Kingdom Duration: 3 Jul 2017 → 7 Jul 2017 |
Conference
Conference | International Workshop on BSDEs, SPDEs and their Applications, BSDE-SPDE 2017 |
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Land | United Kingdom |
By | Edinburgh |
Periode | 03/07/2017 → 07/07/2017 |
Series | Springer Proceedings in Mathematics and Statistics |
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Volume | 289 |
ISSN | 2194-1009 |
- Model uncertainty, Option pricing, Stochastic volatility
Research areas
Links
- https://arxiv.org/pdf/1807.03882
Submitted manuscript
ID: 230389403