UC Irvine

In this paper, we expand upon the robust modeling framework of Multiscale Stochastic Volatility models. A main underpinning of this modeling framework is that the "leverage effect", the correlations between an assets price and its modeled volatility factors are constant. However, there is empirical evidence that the leverage effect varies with time and exhibits stochasticity. The work presented here expands the Multiscale Stochastic Volatility model to incorporate stochastic leverage and then examines the performance in pricing European Call Options via asymptotic analysis and then fits the model to real market data.