ScienceDirect Publication: Finance Research Letters
Wed, 04 Dec 2019 00:01:34 GMT language
Publication date: Available online 28 November 2019
Source: Finance Research Letters
Author(s): Jiling Cao, Jeong-Hoon Kim, See-Woo Kim, Wenjun Zhang
This study is concerned with the elasticity of variance for risky assets. We show that the elasticity of variance for S&P500 exhibits short-range correlations. By using asymptotic and martingale methods, we obtain a semi-analytical expression for the option price in the two-scale regime where the constant elasticity of variance is perturbed by a smooth and bounded function of a rapid fractional Ornstein-Uhlenbeck process with Hurst exponent within
. The associated implied volatility is presented and discussed. As a result, the scope of Markov stochastic elasticity of variance model is extended to a non-Markov case.