Open Access Open Access  Restricted Access Subscription or Fee Access

Bayesian Option Pricing Using Stochastic Volatility Models with Fat-tailed Errors

Hongxi Lin, Liang Jiang

Abstract



This paper mainly explore price option based on the stochastic volatility with fat-tails errors and 'level effect' by correlation factor, which is defined between underlying asset and stochastic volatility. Firstly, we develop Morkov Chain Monte Carlo (MCMC) method to calibrate uncertain parameters in this model under Martingale measure. There is a strong evidence in favor of fait-tailed feature under Martingale measure for daily data. Furthermore, we will detail statements as to how to compute predictive densities under Martingale measure with uncertain parameters. When pricing options on S and P 500 index, substantial improvements are found compared to a stochastic volatility.

Keywords


Fat-tailed feature; Martingale measure; Morkov Chain Monte Carlo (MCMC); Option pricing.

Full Text:

PDF


Disclaimer/Regarding indexing issue:

We have provided the online access of all issues and papers to the indexing agencies (as given on journal web site). It’s depend on indexing agencies when, how and what manner they can index or not. Hence, we like to inform that on the basis of earlier indexing, we can’t predict the today or future indexing policy of third party (i.e. indexing agencies) as they have right to discontinue any journal at any time without prior information to the journal. So, please neither sends any question nor expects any answer from us on the behalf of third party i.e. indexing agencies.Hence, we will not issue any certificate or letter for indexing issue. Our role is just to provide the online access to them. So we do properly this and one can visit indexing agencies website to get the authentic information.