A simple model for option pricing with jumping stochastic volatility (Q2703110)
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scientific article
| Language | Label | Description | Also known as |
|---|---|---|---|
| English | A simple model for option pricing with jumping stochastic volatility |
scientific article |
Statements
6 June 2001
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Black-Scholes model
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jumps in volatility
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A simple model for option pricing with jumping stochastic volatility (English)
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The author regards a simple modification of the Black-Scholes model, whereby the volatility of the stock may jump at a random time. He shows, that, if the market price of volatility risk is not known, but constant, all contingent claims can be valued from the price of some arbitrary chosen ``basis'' options. He gives closed form solutions for the prices of European options and explicit formulas for vega and delta hedging. The prices generated by the model produce a ``smile'' shaped curve of implied volatility.
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