Option pricing for some stochastic volatility models

Purpose – To study stochastic volatility in the pricing of options. Design/methodology/approach – Random-coefficient autoregressive and generalized autoregressive conditional heteroscedastic models are studied. The option-pricing formula is viewed as a moment of a truncated normal distribution. Findings – Kurtosis for RCA and for GARCH process is derived. Application of random coefficient GARCH kurtosis in analytical approximation of option pricing is discussed. Originality/value – Findings are useful in financial modeling.