Analytical approximation of European option prices under a new two-factor non-affine stochastic volatility model

Shou-de Huang; Xin-Jiang He; Shou-de Huang; Xin-Jiang He

doi:10.3934/math.2023243

AIMS Mathematics

2023, Volume 8, Issue 2: 4875-4891. doi: 10.3934/math.2023243

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Research article

Analytical approximation of European option prices under a new two-factor non-affine stochastic volatility model

Shou-de Huang ¹,
Xin-Jiang He ^{2
,
,}

1.
School of Mathematics and Computer Science, Anshun University, Guizhou, China
2.
School of Economics, Zhejiang University of Technology, Hangzhou, China

Received: 22 August 2022 Revised: 06 November 2022 Accepted: 16 November 2022 Published: 09 December 2022
MSC : 91G20

In this paper, the pricing of European options under a new two-factor non-affine stochastic volatility model is studied. In order to reduce the computational complexity, we use the Taylor expansion and Fourier-cosine method to derive an analytical approximation formula for European option prices. Numerical experiments prove that the proposed formula is fast and efficient for pricing European options compared with Monte Carlo simulations. The sensitivity of the parameters is analyzed to explain the rationality of the model. Finally, we present some preliminary empirical analysis revealing that the pricing performance of our proposed model is superior to that of the single-factor model.
- European option,
- Fourier-cosine method,
- two-factor stochastic volatility,
- non-affine
Citation: Shou-de Huang, Xin-Jiang He. Analytical approximation of European option prices under a new two-factor non-affine stochastic volatility model[J]. AIMS Mathematics, 2023, 8(2): 4875-4891. doi: 10.3934/math.2023243

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Abstract

In this paper, the pricing of European options under a new two-factor non-affine stochastic volatility model is studied. In order to reduce the computational complexity, we use the Taylor expansion and Fourier-cosine method to derive an analytical approximation formula for European option prices. Numerical experiments prove that the proposed formula is fast and efficient for pricing European options compared with Monte Carlo simulations. The sensitivity of the parameters is analyzed to explain the rationality of the model. Finally, we present some preliminary empirical analysis revealing that the pricing performance of our proposed model is superior to that of the single-factor model.

References

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