Optimal Volatility Dependent Derivatives in the Stochastic Volatility Model

Forthcoming in The Journal of Derivatives

Posted: 14 Jan 2020 Last revised: 12 Nov 2020

See all articles by Artem Dyachenko

Artem Dyachenko

University of Trier - Faculty of Economics

Marc Oliver Rieger

University of Trier

Date Written: November 12, 2020

Abstract

We consider derivatives that maximize an investor’s expected utility in the stochastic volatility model. We show that the optimal derivative that depends on the stock and its variance significantly outperforms the optimal derivative that depends on the stock only. Such derivatives yield a much higher certainty equivalent return. This implies that investors could benefit from structured financial products that are constructed along these ideas.

Keywords: asset pricing, derivatives, structured products

JEL Classification: G12, G13

Suggested Citation

Dyachenko, Artem and Rieger, Marc Oliver, Optimal Volatility Dependent Derivatives in the Stochastic Volatility Model (November 12, 2020). Forthcoming in The Journal of Derivatives, Available at SSRN: https://ssrn.com/abstract=3508670 or http://dx.doi.org/10.2139/ssrn.3508670

Artem Dyachenko (Contact Author)

University of Trier - Faculty of Economics ( email )

Germany

Marc Oliver Rieger

University of Trier ( email )

15, Universitaetsring
Trier, 54286
Germany

HOME PAGE: http://www.banking-finance.uni-trier.de

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