Article
Full entry |
PDF
(2.9 MB)
Feedback
Keywords:
stochastic differential equation; stochastic volatility; price of a general option; price of the European call option; Monte Carlo approximations
stochastic differential equation; stochastic volatility; price of a general option; price of the European call option; Monte Carlo approximations
Summary:
This paper continues the research started in [J. Štěpán and P. Dostál: The ${\mathrm d}X(t) = Xb(X){\mathrm d}t + X\sigma (X) {\mathrm d}W$ equation and financial mathematics I. Kybernetika 39 (2003)]. Considering a stock price $X(t)$ born by the above semilinear SDE with $\sigma (x,t)=\tilde{\sigma }(x(t)),$ we suggest two methods how to compute the price of a general option $g(X(T))$. The first, a more universal one, is based on a Monte Carlo procedure while the second one provides explicit formulas. We in this case need an information on the two dimensional distributions of ${\mathcal{L}}(Y(s), \tau (s))$ for $s\ge 0,$ where $Y$ is the exponential of Wiener process and $\tau (s)=\int \tilde{\sigma }^{-2}(Y(u))\, {\mathrm d}u$. Both methods are compared for the European option and the special choice $\tilde{\sigma }(y)=\sigma _2I_{(-\infty ,y_0]}(y)+\sigma _1I_{(y_0,\infty )}(y).$
Related articles:
References:
[1] Billingsley P.: Convergence of Probability Measures. Wiley, New York – Chichester – Weinheim 1999 MR 1700749 | Zbl 0944.60003
[2] Geman H., Madan D. B., Yor M.: Stochastic volatility, jumps and hidden time changes. Finance and Stochastics 6 (2002), 63–90 DOI 10.1007/s780-002-8401-3 | MR 1885584 | Zbl 1006.60026
[3] Kallenberg O.: Foundations of Modern Probability. Springer–Verlag, New York – Berlin – Heidelberg 1997 MR 1464694 | Zbl 0996.60001
[4] Rogers L.C.G., Williams D.: Diffusions, Markov Processes and Martingales. Volume 2: Itô Calculus. Cambridge University Press, Cambridge 2000 MR 1780932 | Zbl 0977.60005
[5] Štěpán J., Dostál P.: The ${\mathrm d}X(t)=Xb(X){\mathrm d}t+X\sigma (X)\,{\mathrm d}W$ equation and financial mathematics I. Kybernetika 39 (2003), 653–680 MR 2035643
Search
Partner of