A Note on the Option Pricing with Transaction Costs and Stochastic Volatility
This paper applies finite element modelling to solve nonlinear Heston PDE with transaction costs. The modeling results show that Finite Element Method can provide accurate option price and Greeks under Heston’s stochastic volatility model. The accuracy of the finite element solution depends on the element order, fine meshing scheme and appropriately truncated computational domain. The presence of transaction costs leads to an additional source term, which makes the governing PDE highly nonlinear. After computing the outputs for the simplified model by Lu et al. [Commun Nonlinear Sci Numer Simulat 2021; 103: 105986], the numerical results are carefully checked against the modeling assumptions. The comparison results suggest that the modeling results are not consistent with the modeling assumptions. Hence, there may exist some model risk on option pricing within Lu’s framework
Year of publication: |
[2023]
|
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Authors: | Cao, Chong |
Publisher: |
[S.l.] : SSRN |
Subject: | Optionspreistheorie | Option pricing theory | Transaktionskosten | Transaction costs | Volatilität | Volatility | Stochastischer Prozess | Stochastic process |
Saved in:
freely available
Extent: | 1 Online-Ressource (26 p) |
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Type of publication: | Book / Working Paper |
Language: | English |
Notes: | Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments July 25, 2023 erstellt |
Other identifiers: | 10.2139/ssrn.4520949 [DOI] |
Source: | ECONIS - Online Catalogue of the ZBW |
Persistent link: https://www.econbiz.de/10014352746
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