A Market Model for Stochastic Implied Volatility

In this paper a stochastic volatility model is presented that directly prescribes the stochastic development of the implied Black-Scholes volatilities of a set of given standard options. Thus the model is able to capture the stochastic movements of a full term structure of implied volatilities. The conditions are derived that have to be satisfied to ensure absence of arbitrage in the model and its numerical implementation is discussed.

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Authors:	Schönbucher, Philpp J.
Institutions:	University of Bonn, Germany
Subject:	option pricing \| stochastic volatility \| implied volatility

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Extent:	application/pdf
Series:	Discussion Paper Serie B.
Type of publication:	Book / Working Paper
Language:	English
Classification:	G13 - Contingent Pricing; Futures Pricing
Source:	RePEc - Research Papers in Economics

Persistent link: https://www.econbiz.de/10004968281