Fitting prices with a complete model

The aim of this paper is to introduce some methodologies for parameter estimation in Hobson and Rogers stochastic volatility model (1998). We pay a specific attention to the so-called feedback parameter, which is shown to be crucial for the model to fit correctly the smile curve of implied volatilit...

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Bibliographic Details
Published in:Journal of banking & finance 2006-01, Vol.30 (1), p.247-258
Main Authors: Figà-Talamanca, Gianna, Guerra, Maria Letizia
Format: Article
Language:English
Subjects:
Banking
Complete market
Estimation
Finance
Methodology
Modelling
Option pricing
Options markets
Parameter estimation
Pricing policies
Securities prices
Stochastic models
Stochastic volatility
Stock prices
Studies
Volatility
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Summary:The aim of this paper is to introduce some methodologies for parameter estimation in Hobson and Rogers stochastic volatility model (1998). We pay a specific attention to the so-called feedback parameter, which is shown to be crucial for the model to fit correctly the smile curve of implied volatility and we introduce different procedures for the estimation of the volatility parameters. We finally test the pricing capability of the model on market options prices on the FTSE100 and the S&P500 Indexes, according to the estimation methodologies introduced.
ISSN:0378-4266
1872-6372
DOI:10.1016/j.jbankfin.2005.02.011