Title: General Approximation Schemes for Option Prices in Stochastic Volatility Models
Abstract: In this paper we develop a general method for deriving closed form approximations of European option prices and equivalent implied volatilities in stochastic volatility models. Our method relies on perturbations of the model dynamics and we show how the expansion terms can be calculated using purely probabilistic methods. A flexible way of approximating the equivalent implied volatility from the basic price expansion is also introduced. As an application of our method we derive closed form approximations for call prices and implied volatilities in the Heston (1993) model. The accuracy of these approximations are studied and compared to numerically obtained values.
Publication Year: 2010
Publication Date: 2010-04-14
Language: en
Type: article
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Cited By Count: 1
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