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Modelling the Stochastic Dynamics of Volatility for Equity Indices

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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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Authors and Affiliations

  1. School of Finance and Economics and School of Math. Sciences, University of Technology Sydney, PO Box 123, Broadway, NSW, 2007, Australia

    David Heath & Eckhard Platen

  2. Bankers Trust Australia Ltd., 2 Chifley Square, Sydney, NSW, 2000, Australia

    Simon Hurst

Authors
  1. David Heath
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  2. Simon Hurst
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  3. Eckhard Platen
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Heath, D., Hurst, S. & Platen, E. Modelling the Stochastic Dynamics of Volatility for Equity Indices. Asia-Pacific Financial Markets 8, 179–195 (2001). https://doi.org/10.1023/A:1016216432647

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