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About the decomposition of pricing formulas under stochastic volatility models

Research paper by Raul Merino, Josep Vives

Indexed on: 27 Mar '15Published on: 27 Mar '15Published in: arXiv - Quantitative Finance - Mathematical Finance



Abstract

We obtain a decomposition of the call option price for a very general stochastic volatility diffusion model extending the decomposition obtained by E. Al\`os in [2] for the Heston model. We realize that a new term arises when the stock price does not follow an exponential model. The techniques used are non anticipative. In particular, we see also that equivalent results can be obtained using Functional It\^o Calculus. Using the same generalizing ideas we also extend to non exponential models the alternative call option price decompostion formula obtained in [1] and [3] written in terms of the Malliavin derivative of the volatility process. Finally, we give a general expression for the derivative of the implied volatility under both, the anticipative and the non anticipative case.