Stock Price Distributions with Stochastic Volatility: An Analytic Approach

@inproceedings{Stein1991StockPD,
  title={Stock Price Distributions with Stochastic Volatility: An Analytic Approach},
  author={Elias M. Stein and Jeremy C. Stein},
  year={1991}
}
We study the stock price distributions that arise when prices follow a diffusion process with a stochastically varying volatility parameter. We use analytic techniques to derive an explicit closed-form solution for the case where volatility is driven by an arithmetic Ornstein-Ublenbeck (or AR1) process. We then apply our results to two related problems in the finance literature: (1) options pricing in a world of stochastic volatility, and (2) the relationship between stochastic volatility and… CONTINUE READING

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