A Glimpse at the Mathematics of Stochastic Volatility: Working with the CIR Model

This book is a comprehensive guide to understanding stochastic volatility and its practical application in pricing financial instruments.

The author takes a unique approach by starting with the basics of Financial Mathematics and gradually building towards a deeper understanding of the Cox-Ingersoll-Ross Model (CIR).

The book provides a detailed explanation of the key ideas and techniques required to define stochastic volatility, its history, and how it can be tied to real-world applications. The author then poses an important question: does stock price affect the volatility driving process in the CIR Model? Through a thorough analysis, the book provides groundwork for this hypothesis and presents a detailed explanation of the Ornstein-Uhlenbeck (OU) process.

The final result utilizes real-time bond prices to estimate the equation presented and draws a convincing conclusion. This book is a must-read for anyone interested in understanding stochastic volatility and its practical application in pricing financial instruments.

It provides a comprehensive and detailed explanation of the subject matter, making it an invaluable resource for students, researchers, and professionals alike.