Rough stochastic elasticity of variance and option pricing

Jiling Cao, Jeong Hoon Kim, See Woo Kim, Wenjun Zhang

Research output: Contribution to journalArticlepeer-review

6 Citations (Scopus)

Abstract

This study is concerned with the elasticity of variance for risky assets. We show that the elasticity of variance for S&P500 exhibits short-range correlations. By using asymptotic and martingale methods, we obtain a semi-analytical expression for the option price in the two-scale regime where the constant elasticity of variance is perturbed by a smooth and bounded function of a rapid fractional Ornstein–Uhlenbeck process with Hurst exponent within [Formula presented]. The associated implied volatility is presented and discussed. As a result, the scope of Markov stochastic elasticity of variance model is extended to a non-Markov case.

Original languageEnglish
Article number101381
JournalFinance Research Letters
Volume37
DOIs
Publication statusPublished - 2020 Nov

Bibliographical note

Publisher Copyright:
© 2019 Elsevier Inc.

All Science Journal Classification (ASJC) codes

  • Finance

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