A Lognormal Type Stochastic Volatility Model With Quadratic Drift

@article{Carr2019ALT,
title={A Lognormal Type Stochastic Volatility Model With Quadratic Drift},
author={P. Carr and S. Willems},
journal={Capital Markets: Asset Pricing & Valuation eJournal},
year={2019}
}

Capital Markets: Asset Pricing & Valuation eJournal

This paper presents a novel one-factor stochastic volatility model where the instantaneous volatility of the asset log-return is a diffusion with a quadratic drift and a linear dispersion function. The instantaneous volatility mean reverts around a constant level, with a speed of mean reversion that is affine in the instantaneous volatility level. The steady-state distribution of the instantaneous volatility belongs to the class of Generalized Inverse Gaussian distributions. We show that the… CONTINUE READING