Abstract
In this paper, we discuss a stochastic volatility model with a Lévy driving process and then apply the model to option pricing and hedging. The stochastic volatility in our model is defined by the continuous Markov chain. The risk-neutral measure is obtained by applying the Esscher transform. The option price using this model is computed by the Fourier transform method. We obtain the closed-form solution for the hedge ratio by applying locally risk-minimizing hedging.
| Original language | English |
|---|---|
| Pages (from-to) | 81-97 |
| Number of pages | 17 |
| Journal | Review of Derivatives Research |
| Volume | 15 |
| Issue number | 1 |
| DOIs | |
| State | Published - Apr 2012 |
Keywords
- Continuous Markov chain
- Esscher transform
- Hedging
- Lévy process
- Option pricing
- Regime-switching model
- Stochastic volatility
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Cite this
Kim, Y. S., Fabozzi, F. J., Lin, Z., & Rachev, S. T. (2012). Option pricing and hedging under a stochastic volatility Lévy process model. Review of Derivatives Research, 15(1), 81-97. https://doi.org/10.1007/s11147-011-9070-9