Optimal Volatility Dependent Derivatives in the Stochastic Volatility Model
20 Pages Posted: 14 Jan 2020
Date Written: December 22, 2019
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: Suggested Citation