TITLE:
A Linear Regression Approach for Determining Explicit Expressions for Option Prices for Equity Option Pricing Models with Dependent Volatility and Return Processes
AUTHORS:
Raj Jagannathan
KEYWORDS:
Option Pricing, Black-Scholes Model, Heston’s Model, Risk-Neutral Density Functions, Linear Regression Approach, Implied Volatility Functions, Ito Formula
JOURNAL NAME:
Journal of Mathematical Finance,
Vol.6 No.2,
May
19,
2016
ABSTRACT: We consider a risk-neutral stock-price model where the volatility and the return processes are assumed to be dependent. The market is complete and arbitrage-free. Using a linear regression approach, explicit functions of risk-neutral density functions of stock return functions are obtained and closed form solutions of the corresponding Black-Scholes-type option pricing results are derived. Implied volatility skewness properties are illustrated.