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ABSTRACT

We investigate the effect of option prices when the volatility follows a stochastic process which is correlated with the underlying security price. We derive some analytical results and find an efficient algorithm with the use of path integral techniques from quantum mechanics. We calibrate our model with market data on options on the S&P 500 Index and find that this data is consistent with the volatility undergoing a stochastic process which is negatively correlated with the underlying security (the S&P 500 Index in this case) price.



Marakani Srikant 2000-08-15