Short-Rate-Dependent Volatility Models

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Authors: Tim Leung, Matthew J. Lorig
Cited by: 0

Abstract

We price European options in a class of models in which the volatility of the underlying risky asset depends on the short rate of interest. Our study results in an explicit pricing formula that is expressed in terms of a characteristic function. We provide examples of models in which the characteristic function can be computed analytically and, thus, the value of European options is explicit. Numerical implementation to produce the implied volatility is also presented.

Fields of Study & Subjects

Stochastic processes and financial applications Financial Risk and Volatility Modeling Financial Markets and Investment Strategies

Publication details

Journal / source
arXiv (Cornell University)
Publication date
31 January 2026
Document type
Preprint