A NOTE ON SD REPRESENTATION OF A SV MODEL WITH DG SOLUTION
REZA HABIBI *
Iran Banking Institute, Central Bank of Iran, Iran
*Author to whom correspondence should be addressed.
Abstract
This paper studies the optimal control representation of dynamic system of stochastic volatility model and presents a dynamic game solution to the problem. First, the optimal control problem in a SV model, in the form of dynamic system, is presented. Then, it is interpreted as a dynamic game and is solved using Bellman equation. The price model is taken from [1] and the SV model comes from Heston SV model.
Keywords: Bellman equation, Dynamic game (DG), Optimal control, Stochastic volatility (SV), System dynamic (SD)