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The Journal of Derivatives

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Primary Article

Stock Evolution Under Stochastic Volatility

A Discrete Approach

Dietmar P.J. Leisen
The Journal of Derivatives Winter 2000, 8 (2) 9-27; DOI: https://doi.org/10.3905/jod.2000.319146
Dietmar P.J. Leisen
An assistant professor of finance and mathematics at McGill University in Canada.
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Abstract

Stochastic volatility appears to be a fact of life in real-world derivatives markets, but it presents huge difficulties for valuation models. Adding a second stochastic variable in addition to the asset price significantly complicates matters. And things become only worse if one wants to model the volatility process realistically, as having a mean-reverting drift of the stock price process as a priced factor. Amercican exercise throws further complications into the situation. A number of useful closed-form and numerical approximation models have been developed over time, but only for particular special cases. In this article, Leisen presents a procedure for constructing a general three-dimensional valuation lattice that can handle a broad range of stochastic volatility models, including those in the literature.

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The Journal of Derivatives
Vol. 8, Issue 2
Winter 2000
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Stock Evolution Under Stochastic Volatility
Dietmar P.J. Leisen
The Journal of Derivatives Nov 2000, 8 (2) 9-27; DOI: 10.3905/jod.2000.319146

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Stock Evolution Under Stochastic Volatility
Dietmar P.J. Leisen
The Journal of Derivatives Nov 2000, 8 (2) 9-27; DOI: 10.3905/jod.2000.319146
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