Valuation of European options with stochastic interest rates and transaction costs

Cao, Jiling; Wang, Biyuan; Zhang, Wenjun

doi:10.1080/00207160.2021.1925114

Cited by 2 publications

(1 citation statement)

References 16 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…In recent years, hybrid models that incorporate stochastic interest rates into stochastic models have gained attention [9,10,15,17,24]. Empirical studies also support the integration of stochastic interest rates into option pricing models, as they contribute to improved model results [21].…”

Section: Introductionmentioning

confidence: 99%

Valuing European Option Under Double 3/2-Volatility Jump-Diffusion Model With Stochastic Interest Rate and Stochastic Intensity Under Approximative Fractional Brownian Motion

Bayad,

El Hajaj,

Hilal

2023

Int. J. Anal. Appl.

View full text Add to dashboard Cite

In this study, we propose a more comprehensive and realistic option pricing model based on approximative fractional Brownian motion, building upon recent advancements in this area. Specifically, we utilize the double 3/2-volatility Jump-Diffusion model, which incorporates approximative fractional Brownian motion with 3/2-volatility, stochastic interest rate, and stochastic intensity. To account for the stochastic interest rate, we employ a two-factor Vasicek model. Notably, our model accommodates negative interest rates. Consequently, we develop a multi-factor model with a stochastic interest rate structure for pricing European options and derive a closed-form pricing formula with an analytical solution by applying some algebraic calculations and Lie symmetries. In order to demonstrate the superiority of our proposed model over other classical approaches, we present numerical results that showcase the value of a European call option. This comparative analysis underscores the advantages of our model in comparison to traditional models.

show abstract