Information-based Asset Pricing Of Options Using Stochastic Volatility Models

Abstract

. In asset pricing, explicit models are being constructed for the flow of market information. Financial markets are making use of such models as a basis for asset pricing. With increased globalization of financial markets, investors and traders are becoming more interested in multi-asset products. Options that consist of a portfolio of assets are of interest to investors because they provide diversification across a number of market segments and assets. They are also cheaper in comparison to a portfolio that consists of similar single asset options. With these developments, financial markets are faced with the challenge of determining suitable prices for these multi-asset options. This study looks at the valuation of such options incorporating information using a stochastic volatility model. An approximate price for multi-asset options is derived using the notion of comonotonicity and Wishart processes under the information-based asset pricing framework. The results show that the information flow rate parameter plays a significant role in the prices obtained in the model based on Brody, Hughson and Macrina’s asset pricing framework. The prices obtained using the model give a relatively close fit to the prices observed in the market.