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| Main Authors: | , |
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| Format: | Preprint |
| Published: |
2026
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| Subjects: | |
| Online Access: | https://arxiv.org/abs/2602.00858 |
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| _version_ | 1866915766967730176 |
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| author | Leung, Tim Lorig, Matthew |
| author_facet | Leung, Tim Lorig, Matthew |
| contents | We price European options in a class of models in which the volatility of the underlying risky asset depends on the short rate of interest. Our study results in an explicit pricing formula that depends on knowledge of a characteristic function. We provide examples of models in which the characteristic function can be computed analytically and, thus, the value of European options is explicit. Numerical implementation to produce the implied volatility is also presented. |
| format | Preprint |
| id |
arxiv_https___arxiv_org_abs_2602_00858 |
| institution | arXiv |
| publishDate | 2026 |
| record_format | arxiv |
| spellingShingle | Short-Rate-Dependent Volatility Models Leung, Tim Lorig, Matthew Mathematical Finance We price European options in a class of models in which the volatility of the underlying risky asset depends on the short rate of interest. Our study results in an explicit pricing formula that depends on knowledge of a characteristic function. We provide examples of models in which the characteristic function can be computed analytically and, thus, the value of European options is explicit. Numerical implementation to produce the implied volatility is also presented. |
| title | Short-Rate-Dependent Volatility Models |
| topic | Mathematical Finance |
| url | https://arxiv.org/abs/2602.00858 |