Review of Finance Vol. 3 No. 1 1999
Stochastic Volatility With an Ornstein–Uhlenbeck Process: An Extension
open access
Abstract
In this paper, we reexamine and extend the stochastic volatility model of Stein and Stein (S&S) (1991) where volatility follows a mean–reverting Ornstein–Uhlenbeck process. Using Fourier inversion techniques we are able to allow for correlation between instantaneous volatilities and the underlying stock returns. A closed-form pricing solution for European options is derived and some numerical examples are given. In addition, we discuss the boundary behaviour of the instantaneous volatility at v(t) = 0 and show that S&S do not work with an absolute value process of volatility.
- DOI
- 10.1023/a:1009803506170
- Volume
- 3
- Issue
- 1
- Pages
- 23-46
- Language
- en
- Sources
- openalex bibtex:phds-export.bib crossref