Abstract:We present in our work a continuous time Capital Asset Pricing Model where the volatilities of the market index and the stock are both stochastic. Using a singular perturbation technique, we provide approximations for the prices of european options on both the stock and the index. These approximations are functions of the model parameters. We show then that existing estimators of the parameter beta, proposed in the recent literature, are biased in our setting because they are all based on the assumption that t… Show more
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