European Option Pricing with Stochastic Volatility Models Under Parameter Uncertainty

Author: 

Cohen, S
Tegnér, M

Publication Date: 

1 January 2019

Journal: 

Springer Proceedings in Mathematics and Statistics

Last Updated: 

2020-09-10T09:19:40.21+01:00

Volume: 

289

DOI: 

10.1007/978-3-030-22285-7_5

page: 

123-167

abstract: 

© 2019, Springer Nature Switzerland AG. We consider stochastic volatility models under parameter uncertainty and investigate how model derived prices of European options are affected. We let the pricing parameters evolve dynamically in time within a specified region, and formalise the problem as a control problem where the control acts on the parameters to maximise/minimise the option value. Through a dual representation with backward stochastic differential equations, we obtain explicit equations for Heston’s model and investigate several numerical solutions thereof. In an empirical study, we apply our results to market data from the S&P 500 index where the model is estimated to historical asset prices. We find that the conservative model-prices cover 98% of the considered market-prices for a set of European call options.

Symplectic id: 

891006

Submitted to ORA: 

Not Submitted

Publication Type: 

Journal Article

ISBN-13: 

9783030222840