Option Pricing when the Variance Changes Randomly: Theory, Estimation, and an Application
研究股票方差随机变化时欧式看涨期权的定价，发现需用股票和两个期权构造无风险对冲，并依赖均衡模型得到唯一定价函数，最终将解表示为布莱克-舒尔斯公式与方差分布函数的积分。
In this paper, we examine the pricing of European call options on stocks that have vari? ance rates that change randomly. We study continuous time diffusion processes for the stock return and the standard deviation parameter, and we find that one must use the stock and two options to form a riskless hedge. The riskless hedge does not lead to a unique option pricing function because the random standard deviation is not a traded security. One must appeal to an equilibrium asset pricing model to derive a unique option pricing function. In general, the option price depends on the risk premium associated with the random standard deviation. We find that the problem can be simplified by assuming that volatility risk can be diversified away and that changes in volatility are uncorrelated with the stock return. The resulting solution is an integral ofthe Black-Scholes formula and the distribution function for the variance of the stock price. We show that accurate option prices can be computed via Monte Carlo simulations and we apply the model to a set of actual prices.