Option pricing under stochastic environment of volatility and market price of risk
Since Black-Scholes model was proposed in 1973, it has been applied widely for option pricing. The aim of this paper is to develop European option pricing model taking into account stochastic volatility and stochastic market price of risk (MPR) under the framework of Black-Scholes. Both volatility a...
| Main Authors: | , , |
|---|---|
| Format: | Journal Article |
| Published: |
North Atlantic University Union (N A U N)
2013
|
| Subjects: | |
| Online Access: | http://www.naun.org/main/NAUN/ijmmas/k042001-242.pdf http://hdl.handle.net/20.500.11937/12611 |
| _version_ | 1848748122043318272 |
|---|---|
| author | Phewchean, N Wu, Yong Hong Lenbury, Y |
| author_facet | Phewchean, N Wu, Yong Hong Lenbury, Y |
| author_sort | Phewchean, N |
| building | Curtin Institutional Repository |
| collection | Online Access |
| description | Since Black-Scholes model was proposed in 1973, it has been applied widely for option pricing. The aim of this paper is to develop European option pricing model taking into account stochastic volatility and stochastic market price of risk (MPR) under the framework of Black-Scholes. Both volatility and market price of risk are assumed to be stochastic and assumed to follow Ornstein-Uhlenbeck process. By using an analytical approach of Abraham Loui, explicit formulas are derived for European call and put option prices. Sensitivity of option price to model parameters are tested and the simulation results show the strong characteristic of stochastic model. |
| first_indexed | 2025-11-14T07:00:01Z |
| format | Journal Article |
| id | curtin-20.500.11937-12611 |
| institution | Curtin University Malaysia |
| institution_category | Local University |
| last_indexed | 2025-11-14T07:00:01Z |
| publishDate | 2013 |
| publisher | North Atlantic University Union (N A U N) |
| recordtype | eprints |
| repository_type | Digital Repository |
| spelling | curtin-20.500.11937-126112017-01-30T11:31:42Z Option pricing under stochastic environment of volatility and market price of risk Phewchean, N Wu, Yong Hong Lenbury, Y Black-Scholes model Stochastic volatility Stochastic market price of risk Ornstein-Uhlenbeck process European option pricing model Since Black-Scholes model was proposed in 1973, it has been applied widely for option pricing. The aim of this paper is to develop European option pricing model taking into account stochastic volatility and stochastic market price of risk (MPR) under the framework of Black-Scholes. Both volatility and market price of risk are assumed to be stochastic and assumed to follow Ornstein-Uhlenbeck process. By using an analytical approach of Abraham Loui, explicit formulas are derived for European call and put option prices. Sensitivity of option price to model parameters are tested and the simulation results show the strong characteristic of stochastic model. 2013 Journal Article http://hdl.handle.net/20.500.11937/12611 http://www.naun.org/main/NAUN/ijmmas/k042001-242.pdf North Atlantic University Union (N A U N) restricted |
| spellingShingle | Black-Scholes model Stochastic volatility Stochastic market price of risk Ornstein-Uhlenbeck process European option pricing model Phewchean, N Wu, Yong Hong Lenbury, Y Option pricing under stochastic environment of volatility and market price of risk |
| title | Option pricing under stochastic environment of volatility and market price of risk |
| title_full | Option pricing under stochastic environment of volatility and market price of risk |
| title_fullStr | Option pricing under stochastic environment of volatility and market price of risk |
| title_full_unstemmed | Option pricing under stochastic environment of volatility and market price of risk |
| title_short | Option pricing under stochastic environment of volatility and market price of risk |
| title_sort | option pricing under stochastic environment of volatility and market price of risk |
| topic | Black-Scholes model Stochastic volatility Stochastic market price of risk Ornstein-Uhlenbeck process European option pricing model |
| url | http://www.naun.org/main/NAUN/ijmmas/k042001-242.pdf http://hdl.handle.net/20.500.11937/12611 |