Title: Discrete-time stochastic volatility process in option pricing: a generalisation of the Amin-Ng and the Black-Scholes models

Authors: Anna Pajor

Addresses: Department of Econometrics and Operations Research, Cracow University of Economics, ul. Rakowicka 27, 31-510 Kraków, Poland

Abstract: Most option pricing formulas are derived in the framework of continuous-time models, but predominantly they are used in discrete-time models. In this paper, a new discrete-time econometric model with stochastic volatility and stochastic interest rate is proposed, and within its framework the option pricing formula for a European call option is derived. Thanks to this, the model can be directly used (without any discretisation) for option pricing. Moreover, our formula, under some assumptions, reduces itself to the well-known Amin and Ng formula.

Keywords: option pricing; stochastic volatility; stochastic interest rates; Bayesian inference; options; Amin-Ng model; Black-Scholes model; discrete-time models; modelling; econometrics.

DOI: 10.1504/IJFMD.2016.081699

International Journal of Financial Markets and Derivatives, 2016 Vol.5 No.2/3/4, pp.189 - 211

Received: 10 Sep 2015
Accepted: 15 Aug 2016
Published online: 20 Jan 2017 *

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