Rough stochastic elasticity of variance and option pricing

Jiling Cao, Jeong Hoon Kim, See Woo Kim, Wenjun Zhang

Research output: Contribution to journalArticlepeer-review

4 Citations (Scopus)


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 [Formula presented]. 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.

Original languageEnglish
Article number101381
JournalFinance Research Letters
Publication statusPublished - 2020 Nov

Bibliographical note

Funding Information:
The authors would like to thank José Da Fonseca for valuable discussions and suggestions on empirical studies on elasticity of variance. The author J.-H. Kim was supported by the National Research Foundation of Korea ( NRF-2017R1A2B4003226 ). Appendix A

Publisher Copyright:
© 2019 Elsevier Inc.

All Science Journal Classification (ASJC) codes

  • Finance


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