Multiscale stochastic volatility with the hull-white rate of interest

Jeong-Hoon Kim, Ji Hun Yoon, Seok Hyon Yu

Research output: Contribution to journalArticle

10 Citations (Scopus)

Abstract

Although interest rates fluctuate randomly, many option-pricing models do not fully take into account their stochastic nature because of their generally limited impact on option prices. However, stochastic changes in stochastic interest rates may exert a significant impact on option prices when issues of maturity, hedging, or stochastic volatility are considered. This study incorporates the term structure of a stochastic interest rate driven by a Hull-White process into a stochastic volatility model in order to assess the sensitivity of option prices to changes in interest rate. It demonstrates that a stochastic volatility model with a stochastic interest rate outperforms a model with a constant interest rate, particularly, for short time-to-maturity European options.

Original languageEnglish
Pages (from-to)819-837
Number of pages19
JournalJournal of Futures Markets
Volume34
Issue number9
DOIs
Publication statusPublished - 2014 Jan 1

Fingerprint

Interest rates
Stochastic interest rates
Option prices
Stochastic volatility
Stochastic volatility model
Maturity
Hedging
Option pricing model
Time to maturity
European options
Term structure

All Science Journal Classification (ASJC) codes

  • Accounting
  • Business, Management and Accounting(all)
  • Finance
  • Economics and Econometrics

Cite this

Kim, Jeong-Hoon ; Yoon, Ji Hun ; Yu, Seok Hyon. / Multiscale stochastic volatility with the hull-white rate of interest. In: Journal of Futures Markets. 2014 ; Vol. 34, No. 9. pp. 819-837.
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Multiscale stochastic volatility with the hull-white rate of interest. / Kim, Jeong-Hoon; Yoon, Ji Hun; Yu, Seok Hyon.

In: Journal of Futures Markets, Vol. 34, No. 9, 01.01.2014, p. 819-837.

Research output: Contribution to journalArticle

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