Partial Derivative Approach for Option Pricing in a Simple Stochastic Volatility Model

21 Pages Posted: 18 Oct 2003

See all articles by Miquel Montero

Miquel Montero

University of Barcelona - Departament de Física de la Matèria Condensada

Abstract

We study a market model in which the volatility of the stock may jump at a random time from a fixed value to another fixed value. This model was already described in the literature. We present a new approach to the problem, based on partial derivative equations, which gives a different perspective to the problem. Within our framework we can easily consider several prescriptions for the market price of volatility risk, and interpret their financial meaning. Thus, we recover solutions previously cited in the literature as well as obtain new ones.

Keywords: stochastic volatility models, partial derivative equations, option pricing, completeness, Monte Carlo methods

JEL Classification: C10, C15, C20, C63, G13

Suggested Citation

Montero, Miquel, Partial Derivative Approach for Option Pricing in a Simple Stochastic Volatility Model. Available at SSRN: https://ssrn.com/abstract=440522 or http://dx.doi.org/10.2139/ssrn.440522

Miquel Montero (Contact Author)

University of Barcelona - Departament de Física de la Matèria Condensada ( email )

Martí i Franquès, 1
Barcelona, Catalonia 08028
Spain
+34 93 403 92 53 (Phone)
+34 93 402 11 55 (Fax)

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