Analytical approximation of European option prices under a new two-factor non-affine stochastic volatility model

[摘要] In this paper, the pricing of European options under a new two-factor non-affine stochastic volatility model is studied. In order to reduce the computational complexity, we use the Taylor expansion and Fourier-cosine method to derive an analytical approximation formula for European option prices. Numerical experiments prove that the proposed formula is fast and efficient for pricing European options compared with Monte Carlo simulations. The sensitivity of the parameters is analyzed to explain the rationality of the model. Finally, we present some preliminary empirical analysis revealing that the pricing performance of our proposed model is superior to that of the single-factor model.

[学科分类] 地球科学(综合)

[关键词] European option;Fourier-cosine method;two-factor stochastic volatility;non-affine