Option Pricing under Hybrid Stochastic and Local Volatility
نویسندگان
چکیده
This paper deals with an option pricing model which can be thought of as a hybrid stochastic and local volatility model. This model is built on the local volatility term of the well-known constant elasticity of variance (CEV) model multiplied by a stochastic volatility term driven by a fast mean-reverting Ornstein-Uhlenbeck process. An asymptotic formula for European option price is derived to complement the existing CEV pricing formula. Subsequently, empirical experiments are presented showing a better agreement of the proposed model with market data than the CEV model in terms of dynamics and geometric nature of the implied volatilities.
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