A Review of Stochastic Volatility Processes: Properties and Implications

Posted: 28 Jun 2003

See all articles by Dimitris Psychoyios

Dimitris Psychoyios

University of Piraeus - Department of Industrial Management

George S. Skiadopoulos

University of Piraeus, Department of Banking and Financial Management; Queen Mary, University of London, School of Economics and Finance

Panayotis Alexakis

Athens Stock Exchange

Abstract

Volatility changes stochastically over time. This has implications for option pricing and risk management and it has motivated the development of stochastic volatility option pricing models. The fundamental building block of these models is the stochastic process that is used to model the evolution of volatility over time. In this paper, first we outline some stylized facts that any volatility process should obey. Next, we review concisely the processes that have been commonly used to model the dynamics of the instantaneous volatility. The mathematical properties are clarified, and their implications are discussed. This is of particular importance to practitioners who need to decide on which process to use.

JEL Classification: G13

Suggested Citation

Psychoyios, Dimitrios and Skiadopoulos, George and Skiadopoulos, George and Alexakis, Panayotis, A Review of Stochastic Volatility Processes: Properties and Implications. Available at SSRN: https://ssrn.com/abstract=406900

Dimitrios Psychoyios (Contact Author)

University of Piraeus - Department of Industrial Management ( email )

80, Karaoli & Dimitriou Str.
18534 Piraeus
Greece

George Skiadopoulos

University of Piraeus, Department of Banking and Financial Management ( email )

80 Karaoli & Dimitriou Str.
18534 Piraeus, 185 34 -GR
Greece

HOME PAGE: http://https://sites.google.com/view/george-skiadopoulos

Queen Mary, University of London, School of Economics and Finance

Lincoln's Inn Fields
Mile End Rd.
London, E1 4NS
United Kingdom

Panayotis Alexakis

Athens Stock Exchange ( email )

10 Sophocleous str.
Athens 105 59
Greece

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