English, Article edition: LONG MEMORY STOCHASTIC VOLATILITY IN OPTION PRICING SERGEI FEDOTOV; ABBY TAN

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Bookmark: http://trove.nla.gov.au/version/83269
Physical Description
  • article
Language
  • English

Edition details

Title
  • LONG MEMORY STOCHASTIC VOLATILITY IN OPTION PRICING
Author
  • SERGEI FEDOTOV
  • ABBY TAN
Physical Description
  • article
Notes
  • The aim of this paper is to present a stochastic model that accounts for the effects of a long-memory in volatility on option pricing. The starting point is the stochastic BlackâScholes equation involving volatility with long-range dependence. We define the stochastic option price as a sum of classical BlackâScholes price and random deviation describing the risk from the random volatility. By using the fact that the option price and random volatility change on different time scales, we derive the asymptotic equation for this deviation involving fractional Brownian motion. The solution to this equation allows us to find the pricing bands for options.
  • Long memory, stochastic volatility, option pricing
  • RePEc:wsi:ijtafx:v:08:y:2005:i:03:p:381-392
Language
  • English
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