Stochastic volatility and the mean reverting process

This article employs an approach that is an extension of the Hull and White (<link href="#bib8">1987</link>) model, for pricing European options under the assumption of a mean reverting volatility for the underlying asset. The approach uses a Taylor series expansion method to approximate the price of a European call option in a market with no arbitrage opportunities. The transition to a riskneutral economy is accomplished by introducing an equivalent martingale measure based on the findings of Romano and Touzi (<link href="#bib12">1997</link>). Numerical results are obtained and compared with similar studies (Lewis, <link href="#bib9">2000</link>). © 2003 Wiley Periodicals, Inc. Jrl Fut Mark 23:33–47, 2003