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Pricing Power Options under the Heston Dynamics using the FFT

Ibrahim, S and O'Hara, JG and Constantinou, N (2013) 'Pricing Power Options under the Heston Dynamics using the FFT.' New Trends in Mathematical Sciences, 1 (1). 1 - 9. ISSN 2147-5520

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Abstract

Numerous studies have presented evidence that certain financial assets may exhibit stochastic volatility or jumps, which cannot be captured within the Black-Scholes environment. This work investigates the valuation of power options when the variance follows the Heston model of stochastic volatility. A closed form representation of the characteristic function of the process is derived from the partial differential equation (PDE) of the replicating portfolio. The characteristic function is essential for the computation of the European power option prices via the Fast Fourier Transform (FFT) technique. Numerical results are presented.

Item Type: Article
Uncontrolled Keywords: Power Option; Partial Differential Equation; Heston Model; Characteristic Function; Fast Fourier Transform
Subjects: H Social Sciences > HG Finance
Q Science > QA Mathematics > QA75 Electronic computers. Computer science
Divisions: Faculty of Science and Health > Computer Science and Electronic Engineering, School of
Depositing User: Nick Constantinou
Date Deposited: 01 Feb 2013 13:43
Last Modified: 17 Aug 2017 18:03
URI: http://repository.essex.ac.uk/id/eprint/5431

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