CONFERENCE ON MATHEMATICAL FINANCE

May 19, 20, and 21, 2000
University of Missouri - Columbia

Ronnie Sircar (University of Michigan)

Friday, May 19 3:00-4:00

Pricing, Calibration and Risk Management in a Stochastic Volatility Environment

Abstract: In modern financial markets, investors and trading institutions are faced with an environment of uncertain and changing volatility which must be accounted for in models used for derivative pricing and hedging. We describe an asymptotic and statistical analysis of the problem that exploits the tendency of volatility to come in bursts, or cluster. The analysis is used to calibrate from the observed implied volatility skew and to tackle problems such as pricing exotic and American derivatives, hedging risk, and optimal portfolio allocation.