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P3: Application of Moment Expansion Method to Options Square Root Model
Author: Yun Zhou , Advisor: Steven Heston (Robert H Smith School of Business)
Problem Statement Presentation
Project Proposal
Abstract
We implement the moment expansion based solution to the Options Square Model and we compare it to the Fourier Transform based solution. The stochastic volatility model developed by Heston (1993) is used as the Options Square Root Model or Heston Model. The governing equations consider not only the stochastic spot return but also stochastic volatility, which has a correlation with spot return. Heston (1993) also gave a closed-form solution for the European Call option price based on Fourier Transform. Different from the Fourier Transform approach, we use moment expansion. The moment generating function is used to derive 1 to at least 6 order moments to calculate the options price. This moment expansion based solution is compared with Fourier Transform based solution in terms of accuracy, and implementation difficulty.
MidYear Progress Report and
Presentation
Final Presentation ,
Final Report
