Journal
APPLIED MATHEMATICAL MODELLING
Volume 38, Issue 11-12, Pages 2771-2780Publisher
ELSEVIER SCIENCE INC
DOI: 10.1016/j.apm.2013.11.006
Keywords
Stochastic volatility; Volatility model; Option pricing
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In this paper it is shown how symmetry methods can be used to find exact solutions for European option pricing under a time-dependent 3/2-stochastic volatility model dv = kv(A(t) - v)dt + bv(3/2)dZ. This model with A(t) constant has been proven by many authors to outperform the Heston model in its ability to capture the behaviour of volatility and fit option prices. Further, singular perturbation techniques are used to derive a simple analytic approximation suitable for pricing options with short tenor, a common feature of most options traded in the market. (C) 2013 Elsevier Inc. All rights reserved.
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