Work

Stochastic Volatility With an Ornstein–Uhlenbeck Process: An Extension

Year: 1999

Type: article

Abstract: In this paper, we reexamine and extend the stochastic volatility model of Stein and Stein (S&S) (1991) where volatility follows a mean–reverting Ornstein–Uhlenbeck process. Using Fourier inversion techniques we are able to allow for correlation between instantaneous volatilities and the underlying stock returns. A closed-form pricing solution for European options is derived and some numerical examples are given. In addition, we discuss the boundary behaviour of the instantaneous volatility at v(t) = 0 and show that S&S do not work with an absolute value process of volatility. JEL Classification: G13

Source: European Finance Review

DOI: 10.1023/a:1009803506170

Authors: Rainer Schöbel, Jianwei Zhu

Language: English

Topic: Stochastic processes and financial applications

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: green

OpenAlex ID: W3122710177

FWCI: 5.319

Cites: 5

Cited by: 431

Related to: 10