| Abstract: | This article employs an approach that is an extension of the Hull and White ( 1987 ) 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 ( 1997 ). Numerical results are obtained and compared with similar studies (Lewis, 2000 ). © 2003 Wiley Periodicals, Inc. Jrl Fut Mark 23:33–47, 2003 |
