Option pricing under stochastic volatility: the exponential Ornstein-Uhlenbeck model

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dc.creatorPerello, Josep
dc.creatorSircar, Ronnie
dc.creatorMasoliver, Jaume
dc.date2008-04-16
dc.date2008-05-13
dc.date.accessioned2026-07-07T12:05:47Z
dc.date.available2026-07-07T12:05:47Z
dc.descriptionWe study the pricing problem for a European call option when the volatility of the underlying asset is random and follows the exponential Ornstein-Uhlenbeck model. The random diffusion model proposed is a two-dimensional market process that takes a log-Brownian motion to describe price dynamics and an Ornstein-Uhlenbeck subordinated process describing the randomness of the log-volatility. We derive an approximate option price that is valid when (i) the fluctuations of the volatility are larger than its normal level, (ii) the volatility presents a slow driving force toward its normal level and, finally, (iii) the market price of risk is a linear function of the log-volatility. We study the resulting European call price and its implied volatility for a range of parameters consistent with daily Dow Jones Index data.
dc.description26 pages, 6 colored figures
dc.identifierhttps://arxiv.org/abs/0804.2589
dc.identifierhttp://arxiv.org/abs/0804.2589
dc.identifierJ. Stat. Mech. (2008) P06010
dc.identifierdoi:10.1088/1742-5468/2008/06/P06010
dc.identifier.urihttp://salesiana.dossiersoluciones.com/handle/123456789/208470
dc.subjectPricing of Securities
dc.subjectComputational Physics
dc.subjectPhysics and Society
dc.titleOption pricing under stochastic volatility: the exponential Ornstein-Uhlenbeck model
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