A Closed-Form Solution for Options with Stochastic Volatility with Applications to Bond and Currency Options
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Cites background from "A Closed-Form Solution for Options ..."
...A two-factor pricing kernel with the market return and stochastic volatility as factors is also the standard setup commonly assumed by many stochastic option pricing studies (see, for example, Heston (1993))....
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Cites background or methods from "A Closed-Form Solution for Options ..."
...…V), (8) where the risk-neutral probabilities, 1I1 and 2, are recovered from inverting the respective characteristic functions (see Bates (1996a,c), Heston (1993), and Scott (1997) for similar treatments): HIj(t, T; S (t), R (t), V(t)) 1 1 f0 [e`On[K]fj(t, T, S(t) I tR (, (t); 4)1 2 + - j e R()d…...
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...…model of Cox and Ross (1976); (iv) the Markovian models of Rubinstein (1994) and Alt-Sahalia and Lo (1996); (v) the stochastic-volatility models of Heston (1993), Hull and White (1987a), Melino and Turnbull (1990, 1995), Scott (1987), Stein and Stein (1991), and Wiggins (1987); (vi) the…...
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...Second, this general model allows for a flexible correlation structure between the stock return and its volatility, as opposed to the perfect correlation assumed in, for instance, Heston (1993)....
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2,306 citations
Cites methods from "A Closed-Form Solution for Options ..."
...Characteristic functions have also been used in the pure diffusion context with stochastic volatility (Heston 1993) and with stochastic interest rates (Bakshi and Chen 1997)....
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2,114 citations
References
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"A Closed-Form Solution for Options ..." refers background in this paper
...Many plaudits have been aptly used to describe Black and Scholes’ (1973) contribution to option pricing theory....
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...Standard arbitrage arguments [Black and Scholes (1973), Merton (1973)] demonstrate that the value of any asset U(S, v, t) (including accrued payments) must satisfy the partial differential equation (PDE) (6) The unspecified term (S, v, t) represents the price of volatility risk, and must be…...
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