In this paper we propose a multiscale formulation of Hestons stochastic volatility incorporated by a perturbative form of stochastic elasticity and establish option pricing formulas based upon this hybrid risky asset price model which we call a stochastic elasticity Heston model. Our formulation keeps the analytic tractability of the Heston model while simultaneouly helps capturing the complex nature of the volatility dynamics with the additional stochastic factor. We use both singular and regular perturbation theory to obtain an option pricing integral formula and verify in terms of implied volatility surface that our model outperforms the Heston model effectively by demonstrating very accurate fit to market for full range of maturities, especially, for short maturities.
Keywords. Heston model, stochastic elasticity, multiscale, asymptotics, implied volatility
학회 소식
공지사항