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Option pricing and model calibration under multifactor stochastic volatility and stochastic interest rate - an asymptotic expansion approach
Mälardalen University, School of Education, Culture and Communication, Educational Sciences and Mathematics. (MAM)ORCID iD: 0000-0002-0139-0747
Mälardalen University, School of Education, Culture and Communication, Educational Sciences and Mathematics. (MAM)
Mälardalen University, School of Education, Culture and Communication, Educational Sciences and Mathematics. (MAM)ORCID iD: 0000-0002-0835-7536
Mälardalen University, School of Education, Culture and Communication, Educational Sciences and Mathematics. (MAM)ORCID iD: 0000-0003-4554-6528
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2017 (English)In: Proceedings ASMDA2017 / [ed] Skiadas, Christos H., ISAST: International Society for the Advancement of Science and Technology , 2017, p. 219-231-Conference paper, Published paper (Refereed)
Abstract [en]

Among other limitations, the celebrated Black--Scholes option pricingmodel assumes constant volatility and constant interest rates, which is not supportedby empirical studies on for example implied volatility surfaces. Studiesby many researchers such as Heston in 1993, Christoffersen in 2009, Fouque in2012, Chiarella--Ziveyi in 2013, and the authors' previous work removed the constantvolatility assumption from the Black--Scholes model by introducing one ortwo stochastic volatility factors with constant interest rate. In the present paperwe follow this line but generalize the model by considering also stochasticinterest rate. More specifically, the underlying asset process is governed by amean-reverting interest rate process in addition to two mean-reverting stochasticvolatility processes of fast and slow mean-reverting rates respectively. The focusis to derive an approximating formula for pricing the European option using adouble asymptotic expansion method.

Place, publisher, year, edition, pages
ISAST: International Society for the Advancement of Science and Technology , 2017. p. 219-231-
National Category
Probability Theory and Statistics
Research subject
Mathematics/Applied Mathematics
Identifiers
URN: urn:nbn:se:mdh:diva-45223OAI: oai:DiVA.org:mdh-45223DiVA, id: diva2:1351541
Conference
17th Applied Stochastic Models and Data Analysis International Conference with Demographics Workshop
Available from: 2019-09-16 Created: 2019-09-16 Last updated: 2019-09-24Bibliographically approved

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Malyarenko, AnatoliyCanhanga, BetuelNi, YingSilvestrov, SergeiRancic, Milica

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