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From Constant To Stochastic Volatility: Black-Scholes Versus Heston Option Pricing Models, Hsin-Fang Wu
From Constant To Stochastic Volatility: Black-Scholes Versus Heston Option Pricing Models, Hsin-Fang Wu
Senior Projects Spring 2019
The Nobel Prize-winning the Black-Scholes Model for stock option pricing has a simple formula to calculate the option price, but its simplicity comes with crude assumptions. The two major assumptions of the model are that the volatility is constant and that the stock return is normally distributed. Since 1973, and especially in the 1987 Financial Crisis, these assumptions have been proven to limit the accuracy and applicability of the model, although it is still widely used. This is because, in reality, observing a stock return distribution graph would show that there is an asymmetry or a leptokurtic shown in the …