Some Explicit Formulae for the Hull and White Stochastic Volatility Model ()

Lorella Fatone, Francesca Mariani, Maria Cristina Recchioni, Francesco Zirilli

Dipartimento di Management, Università Politecnica delle Marche, Ancona, Italy.

Dipartimento di Matematica “G. Castelnuovo”, Università di Roma “La Sapienza”, Roma, Italy.

Dipartimento di Matematica e Informatica, Università di Camerino, Camerino, Italy.

Dipartimento di Scienze Economiche, Università degli Studi di Verona, Verona, Italy.

**DOI: **10.4236/ijmnta.2013.21003
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Dipartimento di Management, Università Politecnica delle Marche, Ancona, Italy.

Dipartimento di Matematica “G. Castelnuovo”, Università di Roma “La Sapienza”, Roma, Italy.

Dipartimento di Matematica e Informatica, Università di Camerino, Camerino, Italy.

Dipartimento di Scienze Economiche, Università degli Studi di Verona, Verona, Italy.

An explicit formula for the transition probability density function of the Hull and White stochastic volatility model in presence of nonzero correlation between the stochastic differentials of the Wiener processes on the right hand side of the model equations is presented. This formula gives the transition probability density function as a two dimensional integral of an explicitly known integrand. Previously an explicit formula for this probability density function was known only in the case of zero correlation. In the case of nonzero correlation from the formula for the transition probability density function we deduce formulae (expressed by integrals) for the price of European call and put options and closed form formulae (that do not involve integrals) for the moments of the asset price logarithm. These formulae are based on recent results on the Whittaker functions [1] and generalize similar formulae for the SABR and multiscale SABR models [2]. Using the option pricing formulae derived and the least squares method a calibration problem for the Hull and White model is formulated and solved numerically. The calibration problem uses as data a set of option prices. Experiments with real data are presented. The real data studied are those belonging to a time series of the USA S&P 500 index and of the prices of its European call and put options. The quality of the model and of the calibration procedure is established comparing the forecast option prices obtained using the calibrated model with the option prices actually observed in the financial market. The website:* http*://*www.econ.univpm.it*/*recchioni*/*finance*/*w*17 contains some auxiliary material including animations and interactive applications that helps the understanding of this paper. More general references to the work of the authors and of their coauthors in mathematical finance are available in the website: *http*://*www.econ.univpm.it*/*recchioni/finance*.

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L. Fatone, F. Mariani, M. Recchioni and F. Zirilli, "Some Explicit Formulae for the Hull and White Stochastic Volatility Model," *International Journal of Modern Nonlinear Theory and Application*, Vol. 2 No. 1, 2013, pp. 14-33. doi: 10.4236/ijmnta.2013.21003.

Conflicts of Interest

The authors declare no conflicts of interest.

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