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Option Pricing under Stochastic Volatility and Trading Volume
2004
Social Science Research Network
This paper presents a pricing formula for European options derived from a model in which changes in the underlying price and trading volumes are jointly determined by exogenous events. This speci cation makes increments to the volatility depend on the current level of volatility and news and thereby accounts for the observed persistence in volatility. Moreover, it makes volatility an observable variable. The model accounts well for time varying volatility smiles and term structures, and that
doi:10.2139/ssrn.676484
fatcat:gckhskp7bne6zpwajpxxwwxumy