Bulletin of the
Korean Mathematical Society BKMS

We examine a unified approach of calculating the closed form solutions of option price under stochastic volatility models using stochastic calculus and the Fourier inversion formula. In particular, we review and derive the option pricing formulas under Heston and correlated Stein-Stein models using a systematic and comprehensive approach which were derived individually earlier. We compare the empirical performances of the two stochastic volatility models and the Black-Scholes model in pricing KOSPI 200 index options.

Keywords: option pricing, stochastic volatility model, Heston model, correlated Stein-Stein model, KOSPI 200 index option

MSC numbers: Primary 91B28, 65C20