Option Pricing With Volatility of Volatility: A Simple, Closed-Form Formula
7 Pages Posted: 24 Jun 2019 Last revised: 20 Nov 2019
Date Written: June 24, 2019
We overcome the limitations of the Black-Scholes model. It is the first paper to provide a simple, closed-form formula (that doesn't require numerical/computational methods) under stochastic volatility. The formula is as simple as the classical Black-Scholes pricing formula. Furthermore, this paper modifies the Black-Scholes model to make it consistent with the empirical reality. Moreover, it is the first paper to show that the option price depends on the volatility of the volatility using the classical Black-Scholes framework.
Keywords: option pricing, stochastic volatility, closed-form solution, Black-Scholes PDE, volatility of volatility
JEL Classification: G0, C0, C5
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