Multiscale stochastic volatility with the hull-white rate of interest

Jeong Hoon Kim, Ji Hun Yoon, Seok Hyon Yu

Research output: Contribution to journalArticlepeer-review

15 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 Sep

All Science Journal Classification (ASJC) codes

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

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