Stochastic Volatility with an Ornstein-Uhlenbeck Process: An Extension

Schoebel, Rainer; Zhu, Jianwei

doi:10.2139/ssrn.100831

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Stochastic Volatility with an Ornstein-Uhlenbeck Process: An Extension

18 Pages Posted: 7 Sep 1998

See all articles by Rainer Schoebel

Rainer Schoebel

University of Tuebingen - Faculty of Economics and Social Sciences

Jianwei Zhu

University of Tuebingen

Date Written: June 1998

Abstract

In this paper, we reexamine and extend the stochastic volatility model of Stein and Stein (1991) where volatility follows a mean-reversion Ornstein-Uhlenbeck process. Using Fourier inversion techniques we are able to allow for correlation between instantaneous volatilities and the underlying stock returns. A closed-form pricing solution for European options is derived and some numerical examples are given.

JEL Classification: G13

Suggested Citation: Suggested Citation

Schoebel, Rainer and Zhu, Jianwei, Stochastic Volatility with an Ornstein-Uhlenbeck Process: An Extension (June 1998). Available at SSRN: https://ssrn.com/abstract=100831 or http://dx.doi.org/10.2139/ssrn.100831