### Paper #1188

- Títol:
- A decomposition formula for option prices in the Heston model and applications to option pricing approximation
- Autor:
- Elisa AlÃ²s
- Data:
- Desembre 2009
- Resum:
- By means of classical Itô's 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 first 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.
- Paraules clau:
- Stochastic Volatility, Heston Model, ItÃ´'s Calculus.
- Codis JEL:
- G13
- Àrea de Recerca:
- Estadística, Econometria i Mètodes Quantitatius

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