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research article

The Jacobi stochastic volatility model

Ackerer, Damien  
•
Filipović, Damir
•
Pulido, Sergio
July 1, 2018
Finance and Stochastics

We introduce a novel stochastic volatility model where the squared volatility of the asset return follows a Jacobi process. It contains the Heston model as a limit case. We show that the joint density of any finite sequence of log-returns admits a Gram–Charlier A expansion with closed-form coefficients. We derive closed-form series representations for option prices whose discounted payoffs are functions of the asset price trajectory at finitely many time points. This includes European call, put and digital options, forward start options, and can be applied to discretely monitored Asian options. In a numerical study, we show that option prices can be accurately and efficiently approximated by truncating their series representations.

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Type
research article
DOI
10.1007/s00780-018-0364-8
Author(s)
Ackerer, Damien  
Filipović, Damir
Pulido, Sergio
Date Issued

2018-07-01

Published in
Finance and Stochastics
Volume

22

Issue

3

Start page

667

End page

700

Subjects

Jacobi process

•

Option pricing

•

Polynomial model

•

Stochastic volatility

URL
https://link.springer.com/article/10.1007%2Fs00780-018-0364-8
Editorial or Peer reviewed

REVIEWED

Written at

EPFL

EPFL units
CSF  
Available on Infoscience
October 9, 2018
Use this identifier to reference this record
https://infoscience.epfl.ch/handle/20.500.14299/148770
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