Option Pricing With Volatility of Volatility: A Simple, Closed-Form Formula

7 Pages Posted: 24 Jun 2019 Last revised: 20 Nov 2019

See all articles by Moawia Alghalith

Moawia Alghalith

University of the West Indies (UWI)

Date Written: June 24, 2019

Abstract

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

Suggested Citation

Alghalith, Moawia, Option Pricing With Volatility of Volatility: A Simple, Closed-Form Formula (June 24, 2019). Available at SSRN: https://ssrn.com/abstract=3409361 or http://dx.doi.org/10.2139/ssrn.3409361

Moawia Alghalith (Contact Author)

University of the West Indies (UWI) ( email )

Trinidad and Tobago

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