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- Publisher
- Springer International Publishing
- Copyright
- © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2021
- ISBN
- 978-3-030-85324-2
- Pages
- 123 –145
- DOI
- 10.1007/978-3-030-85325-9_8
- Publisher site
- See Chapter on Publisher Site
Abstract
[An explicit weak solution for the 3/2 stochastic volatility model is obtained and used to develop a simulation algorithm for option pricing purposes. The 3/2 model is a non-affine stochastic volatility model whose variance process is the inverse of a CIR process. This property is exploited here to obtain an explicit weak solution, similarly to Kouritzin (Int J Theor Appl Finance 21(01):1850006, 2018) for the Heston model. A simulation algorithm based on this solution is proposed and tested via numerical examples. The performance of the resulting pricing algorithm is comparable to that of other popular simulation algorithms.]
Published: Aug 5, 2021
Keywords: 3/2 model; Explicit solutions; Weak solutions; Stochastic volatility; Monte Carlo simulations; Option pricing; Non-affine volatility