A decomposition formula for option prices in the Heston model and applications to option pricing approximation
نویسنده
چکیده
By means of classical Itôs calculus we decompose option prices as the sum of the classical Black-Scholes formula with volatility parameter equal to the root-mean-square future average volatility plus a term due by correlation and a term due to the volatility of the volatility. This decomposition allows us to develop rst and second-order approximation formulas for option prices and implied volatilities in the Heston volatility framework, as well as to study their accuracy. Numerical examples are given. Keywords: Stochastic volatility, Heston model, Itôs calculus. JEL Classi cation: G13 Mathematics Subject Classi cation (2000): 91B28, 91B70
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عنوان ژورنال:
- Finance and Stochastics
دوره 16 شماره
صفحات -
تاریخ انتشار 2012