Estimation of call prices for some stochastic volatility models

Issue title: Statistical Estimations in Complex Problems

Guest editors: Alexander Topchishvili

Article type: Research Article

Authors: Gong, Hui^{a; *} | Thavaneswaran, Aerambamoorthy^b | Kalajdzievska, Darja^c

Affiliations: [a] Department of Mathematics and Computer Science, Valparaiso University, Valparaiso, IN, USA | [b] Department of Statistics, University of Manitoba, Winnipeg, Manitoba, Canada | [c] Department of Mathematics, University of Manitoba, Winnipeg, Manitoba, Canada | Minneapolis, USA

Correspondence: [*] Corresponding author: Hui Gong, Department of Mathematics and Computer Science, Valparaiso University, Valparaiso, IN 46383, USA. Tel.: +1 219 464 5033; E-mail: hughgong@gmail.com.

Abstract: Recently there has been a growing interest in using stochastic volatility models in option pricing. A proposed option pricing valuation method is to use characteristic function. In this paper, we present a theory to obtain closed-form expressions of conditional characteristic functions for option pricing for several stochastic volatility models, based on partial differentiation equation. We also compare the option prices from our presented method and a recursive method introduced by Heston and Nandi [8]. Our method significantly reduces the computation time by avoiding the recursive process.

Keywords: Partial Differential Equation (PDE), stochastic volatility models, conditional characteristic function, option pricing

DOI: 10.3233/MAS-140292

Journal: Model Assisted Statistics and Applications, vol. 9, no. 3, pp. 191-200, 2014