SFB 303 Discussion Paper No. B - 407

Author: Leisen, Dietmar P.J.
Title: Stock Evolution under Stochastic Volatility: A Discrete Approach
Abstract: This paper examines the pricing of options by approximating extensions of the Black-Scholes setup in which volatility follows a separate diffusion process. It gereralizes the well-known binomial model, constructing a discrete two-dimensional lattice. We discuss convergence issues extensively and calculate prices and implied volatilities for European- and American-style put options.
Keywords: binomial model, option valuation, lattice approach, stochastic volatility
JEL-Classification-Number: G13
Creation-Date: revised version May 1999
URL: ../1999/b/bonnsfb407.pdf

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