Acknowledging the fact that volatility is changing over time in time series of asset returns as well as in the empirical variances implied from option prices through the Black-Scholes (1973) model, there have been numerous recent studies on option pricing with time-varying volatility. Many authors have proposed to model asset return dynamics using the so-called stochastic volatility (SV) models.
While the stochastic volatility generalization has been shown to improve over the Black-Scholes model in terms of the explanatory power for asset return dynamics, its empirical implications on option pricing have not yet been adequately tested due to the aforementioned difficulty involved in the estimation.