Valuing Options in Heston's Stochastic Volatility Model: Another Analytical Approach

Valuing Options in Heston's Stochastic Volatility Model: Another Analytical Approach

We are concerned with the valuation of European options in the Heston stochastic volatility model with correlation. Based on Mellin transforms, we present new solutions for the price of European options and hedging parameters. In contrast to Fourier-based approaches, where the transformation variabl...

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Main Author: Robert Frontczak
Format: Article
Language:English
Published: Hindawi Limited 2011-01-01
Series:Journal of Applied Mathematics
Online Access:http://dx.doi.org/10.1155/2011/198469
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spelling doaj-98b9f224701b48ff80d19f0526a6f4ea2020-11-24T22:34:24ZengHindawi LimitedJournal of Applied Mathematics1110-757X1687-00422011-01-01201110.1155/2011/198469198469Valuing Options in Heston's Stochastic Volatility Model: Another Analytical ApproachRobert Frontczak0Faculty of Economics and Business Administration, Eberhard Karls University of Tübingen, Mohlstrasse 36, 72074 Tübingen, GermanyWe are concerned with the valuation of European options in the Heston stochastic volatility model with correlation. Based on Mellin transforms, we present new solutions for the price of European options and hedging parameters. In contrast to Fourier-based approaches, where the transformation variable is usually the log-stock price at maturity, our framework focuses on directly transforming the current stock price. Our solution has the nice feature that it requires only a single integration. We make numerical tests to compare our results with Heston's solution based on Fourier inversion and investigate the accuracy of the derived pricing formulae.http://dx.doi.org/10.1155/2011/198469
collection DOAJ
language English
format Article
sources DOAJ
author Robert Frontczak
spellingShingle Robert Frontczak
Valuing Options in Heston's Stochastic Volatility Model: Another Analytical Approach
Journal of Applied Mathematics
author_facet Robert Frontczak
author_sort Robert Frontczak
title Valuing Options in Heston's Stochastic Volatility Model: Another Analytical Approach
title_short Valuing Options in Heston's Stochastic Volatility Model: Another Analytical Approach
title_full Valuing Options in Heston's Stochastic Volatility Model: Another Analytical Approach
title_fullStr Valuing Options in Heston's Stochastic Volatility Model: Another Analytical Approach
title_full_unstemmed Valuing Options in Heston's Stochastic Volatility Model: Another Analytical Approach
title_sort valuing options in heston's stochastic volatility model: another analytical approach
publisher Hindawi Limited
series Journal of Applied Mathematics
issn 1110-757X
1687-0042
publishDate 2011-01-01
description We are concerned with the valuation of European options in the Heston stochastic volatility model with correlation. Based on Mellin transforms, we present new solutions for the price of European options and hedging parameters. In contrast to Fourier-based approaches, where the transformation variable is usually the log-stock price at maturity, our framework focuses on directly transforming the current stock price. Our solution has the nice feature that it requires only a single integration. We make numerical tests to compare our results with Heston's solution based on Fourier inversion and investigate the accuracy of the derived pricing formulae.
url http://dx.doi.org/10.1155/2011/198469
work_keys_str_mv AT robertfrontczak valuingoptionsinhestonsstochasticvolatilitymodelanotheranalyticalapproach
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