Numéro
J. Phys. I France
Volume 7, Numéro 12, December 1997
Page(s) 1733 - 1753
DOI https://doi.org/10.1051/jp1:1997167
DOI: 10.1051/jp1:1997167
J. Phys. I France 7 (1997) 1733-1753

A Path Integral Approach to Option Pricing with Stochastic Volatility: Some Exact Results

Belal E. Baaquie

Department of Physics, National University of Singapore, Kent Ridge, Singapore 119260



(Received 28 October 1996, revised 2 May 1997, accepted 30 July 1997)

Abstract
The Black-Scholes formula for pricing options on stocks and other securities has been generalized by Merton and Garman to the case when stock volatility is stochastic. The derivation of the price of a security derivative with stochastic volatility is reviewed starting from the first principles of finance. The equation of Merton and Garman is then recast using the path integration technique of theoretical physics. The price of the stock option is shown to be the analogue of the Schrödinger wavefunction of quantum mechanics and the exact Hamiltonian and Lagrangian of the system is obtained. The results of Hull and White are generalized to the case when stock price and volatility have non-zero correlation. Some exact results for pricing stock options for the general correlated case are derived.



© Les Editions de Physique 1997

Current usage metrics show cumulative count of Article Views (full-text article views including HTML views, PDF and ePub downloads, according to the available data) and Abstracts Views on Vision4Press platform.

Data correspond to usage on the plateform after 2015. The current usage metrics is available 48-96 hours after online publication and is updated daily on week days.

Initial download of the metrics may take a while.