Valuation of European Options Under an Uncertain Market Price of Volatility Risk.pdf (2.01 MB)
Valuation of European options under an uncertain market price of volatility risk
journal contribution
posted on 2023-06-10, 04:51 authored by Max Jensen, Bartosz JaroszkowskiWe propose a model to quantify the effect of parameter uncertainty on the option price in the Heston model. More precisely, we present a Hamilton–Jacobi–Bellman framework which allows us to evaluate best and worst case scenarios under an uncertain market price of volatility risk. For the numerical approximation the Hamilton–Jacobi–Bellman equation is reformulated to enable the solution with a finite element method. A case study with butterfly options exhibits how the dependence of Delta on the magnitude of the uncertainty is nonlinear and highly varied across the parameter regime.
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Publication status
- Published
File Version
- Published version
Journal
Applied Mathematical FinanceISSN
1350-486XPublisher
Taylor & FrancisExternal DOI
Issue
3Volume
29Page range
213-226Department affiliated with
- Mathematics Publications
Research groups affiliated with
- Numerical Analysis and Scientific Computing Research Group Publications
Full text available
- Yes
Peer reviewed?
- Yes
Legacy Posted Date
2022-09-27First Open Access (FOA) Date
2023-02-02First Compliant Deposit (FCD) Date
2022-09-27Usage metrics
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