Valuation of European options under an uncertain market price of volatility risk

Jensen, Max and Jaroszkowski, Bartosz (2022) Valuation of European options under an uncertain market price of volatility risk. Applied Mathematical Finance. ISSN 1350-486X (Accepted)

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Abstract

We 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.

Item Type: Article
Schools and Departments: School of Mathematical and Physical Sciences > Mathematics
Research Centres and Groups: Numerical Analysis and Scientific Computing Research Group
SWORD Depositor: Mx Elements Account
Depositing User: Mx Elements Account
Date Deposited: 27 Sep 2022 10:29
Last Modified: 27 Sep 2022 10:30
URI: http://sro.sussex.ac.uk/id/eprint/108155

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