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Activity Number:
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247
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Type:
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Contributed
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Date/Time:
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Tuesday, July 31, 2007 : 8:30 AM to 10:20 AM
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Sponsor:
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Business and Economics Statistics Section
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| Abstract - #309464 |
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Title:
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An Approximation Scheme for Option Pricing for Stochastic Volatility Models
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Author(s):
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Jungyeon Yoon*+ and Chuanshu Ji and Eric Renault
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Companies:
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The University of North Carolina at Chapel Hill and The University of North Carolina at Chapel Hill and The University of North Carolina at Chapel Hill
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Address:
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Statistics, 214 Conner Drive, Chapel Hill, NC, 27514,
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Keywords:
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Option Pricing ; MCMC ; Stochastic Volatility ; Numerical approximations
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Abstract:
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Stochastic volatility models have gradually emerged as a useful way of modeling time-varying volatility with significant potential applications, especially in finance. Stochastic volatility models alone have not proven entirely empirically successful. We use the stochastic volatility models that allow random jumps to occur in stock prices. While we keep analytical tractability that is challenged by many alternative models to Black-Scholes model by using the generalized Black-Scholes formula, we cannot avoid the computational cost that is caused by the integrals in the option pricing formula. In this paper, we propose an approximation scheme to those integrals. With MCMC algorithm, the scheme is tested and validated on simulated data. Our method is proven to be accurate and computationally much more efficient.
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