Tornar a Working Papers

Paper #1188

A decomposition formula for option prices in the Heston model and applications to option pricing approximation
Elisa Alòs
Desembre 2009
By means of classical It'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, Itô's Calculus.
Codis JEL:
Àrea de Recerca:
Estadística, Econometria i Mètodes Quantitatius

Descarregar el paper en format PDF