S-Space College of Social Sciences (사회과학대학) Institute of Economics Research (경제연구소) Seoul Journal of Economics (SJE) Seoul Journal of Economics vol.15(4) (Winter 2002)
Pricing Call Options under Stochastic Volatilities
- Issue Date
- Seoul Journal of Economics, Vol.15 No.4, pp. 499-528
- This paper derives a closed-form solution for the European call option price when the volatility of the underlying stock returns is governed by a diffusion process. The model uses the continuity property of a diffusion process and the martingale approach to valuation of assets under no arbitrage. The pricing formula differs from the Black-Scholes formula in that it needs a volatility adjustment. The volatility movement is allowed to be contemporaneously correlated with the stock price movement.