Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5102511 | Physica A: Statistical Mechanics and its Applications | 2017 | 27 Pages |
Abstract
In this paper, we investigate the pricing issue of vulnerable options with stochastic volatility by decomposing stochastic volatility into the long-term and short-term volatility. We describe the short-term fluctuation of stochastic volatility using a mean-reverting process, and assume the long-term volatility to be a constant. Based on the proposed model, we derive a pricing formula of vulnerable options in a special case. Numerical results are presented to illustrate the impacts of two stochastic volatility components on vulnerable option prices.
Related Topics
Physical Sciences and Engineering
Mathematics
Mathematical Physics
Authors
Guanying Wang, Xingchun Wang, Ke Zhou,