dorsal/arxiv
View SchemaMarket memory and fat tail consequences in option pricing on the expOU stochastic volatility model
| Authors | Josep Perello |
|---|---|
| Categories | |
| ArXiv ID | physics/0607265 |
| URL | https://arxiv.org/abs/physics/0607265 |
| DOI | 10.1016/j.physa.2007.02.050 |
| Journal | Physica A 382 (2007) 213-218 |
Abstract
The expOU stochastic volatility model is capable of reproducing fairly well most important statistical properties of financial markets daily data. Among them, the presence of multiple time scales in the volatility autocorrelation is perhaps the most relevant which makes appear fat tails in the return distributions. This paper wants to go further on with the expOU model we have studied in Ref. 1 by exploring an aspect of practical interest. Having as a benchmark the parameters estimated from the Dow Jones daily data, we want to compute the price for the European option. This is actually done by Monte Carlo, running a large number of simulations. Our main interest is to "see" the effects of a long-range market memory from our expOU model in its subsequent European call option. We pay attention to the effects of the existence of a broad range of time scales in the volatility. We find that a richer set of time scales brings to a higher price of the option. This appears in clear contrast to the presence of memory in the price itself which makes the price of the option cheaper.
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"abstract": "The expOU stochastic volatility model is capable of reproducing fairly well\nmost important statistical properties of financial markets daily data. Among\nthem, the presence of multiple time scales in the volatility autocorrelation is\nperhaps the most relevant which makes appear fat tails in the return\ndistributions. This paper wants to go further on with the expOU model we have\nstudied in Ref. 1 by exploring an aspect of practical interest. Having as a\nbenchmark the parameters estimated from the Dow Jones daily data, we want to\ncompute the price for the European option. This is actually done by Monte\nCarlo, running a large number of simulations. Our main interest is to \"see\" the\neffects of a long-range market memory from our expOU model in its subsequent\nEuropean call option. We pay attention to the effects of the existence of a\nbroad range of time scales in the volatility. We find that a richer set of time\nscales brings to a higher price of the option. This appears in clear contrast\nto the presence of memory in the price itself which makes the price of the\noption cheaper.",
"arxiv_id": "physics/0607265",
"authors": [
"Josep Perello"
],
"categories": [
"physics.soc-ph",
"q-fin.PR"
],
"doi": "10.1016/j.physa.2007.02.050",
"journal_ref": "Physica A 382 (2007) 213-218",
"title": "Market memory and fat tail consequences in option pricing on the expOU stochastic volatility model",
"url": "https://arxiv.org/abs/physics/0607265"
},
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