An approximate method to option pricing in the Heston model
Publish place: 3rd Conference on Financial Mathematics and Applications
Publish Year: 1391
نوع سند: مقاله کنفرانسی
زبان: English
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شناسه ملی سند علمی:
CFMA03_146
تاریخ نمایه سازی: 16 خرداد 1394
Abstract:
The Heston model is one of the most popular stochastic volatility models for derivativespricing, and it is a mathematical model describing the evolution of the volatility of an un-derlying asset. The model proposed by Heston(1993), takes into account non-lognormaldistribution of the assets returns, leverage e ect and the important mean-reverting prop-erty of volatility. In addition, it has a semi-closed form solution for European options.In this paper by means of classical It^o calculus, we decompose option prices as the sumof the classical Black-Scholes formula.This decomposition allows us to develop rst- andsecond-order approximation formulas for option prices and implied volatilities in the Hes-ton volatility framework, as well as to study their accuracy for short maturities. Moreover,we show that the corresponding approximations for the implied volatility are linear( rst-order approximation) and quadratic(second-order approximation) in the log stock price.
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Authors
Kazem Nouri
Department of Mathematics, Faculty of Mathematics, Statistics and Computer Sciences, Semnan University, Semnan, Iran
Behzad Abbasi
Department of Mathematics, Faculty of Mathematics, Statistics and Computer Sciences, Semnan University, Semnan, Iran
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