Modelling the Stochastic Dynamics of Volatility for Equity Indices |
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| Authors: | David Heath Simon Hurst Eckhard Platen |
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| Affiliation: | (1) School of Finance and Economics and School of Math. Sciences, University of Technology Sydney, PO Box 123, Broadway, NSW, 2007, Australia;(2) Bankers Trust Australia Ltd., 2 Chifley Square, Sydney, NSW, 2000, Australia |
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| Abstract: | The paper develops a class of continuous timestochastic volatility models, which generate asset price returnsthat are approximately Student t distributed. Using thecriterion of local risk minimisation in an incomplete marketsetting, option prices are computed. It is shown that impliedvolatility smile and skew patterns of the type often observed inthe markets can be obtained from this class of stochasticvolatility models. |
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| Keywords: | incomplete market indices stochastic volatility |
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