Pricing of the geometric Asian options under a multifactor stochastic volatility model

DOI10.1016/J.CAM.2021.113986zbMATH Open1490.91219arXiv1912.10640OpenAlexW2996081223MaRDI QIDQ2074887FDOQ2074887

Authors: Yanyan Li 

Publication date: 11 February 2022

Published in: Journal of Computational and Applied Mathematics (Search for Journal in Brave)

Abstract: This paper focuses on the pricing of continuous geometric Asian options (GAOs) under a multifactor stochastic volatility model. The model considers fast and slow mean reverting factors of volatility, where slow volatility factor is approximated by a quadratic arc. The asymptotic expansion of the price function is assumed, and the first order price approximation is derived using the perturbation techniques for both floating and fixed strike GAOs. Much simplified pricing formulae for the GAOs are obtained in this multifactor stochastic volatility framework. The zeroth order term in the price approximation is the modified Black-Scholes price for the GAOs. This modified price is expressed in terms of the Black-Scholes price for the GAOs. The accuracy of the approximate option pricing formulae is established, and the model parameter is also estimated by capturing the volatility smiles.

Full work available at URL: https://arxiv.org/abs/1912.10640

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zbMATH Keywords

option pricinggeometric Asian optionsmodified Black-Scholes pricemultifactor stochastic volatilityslow volatility factor

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Stochastic partial differential equations (aspects of stochastic analysis) (60H15) Numerical methods (including Monte Carlo methods) (91G60) PDEs in connection with game theory, economics, social and behavioral sciences (35Q91) PDEs with randomness, stochastic partial differential equations (35R60) Applications of stochastic analysis (to PDEs, etc.) (60H30)

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Cited In (8)

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• Valuing equity-linked guaranteed minimum death benefits with \textit{European}-style \textit{Asian} payoffs under a regime switching jump-diffusion model
• Geometric Asian options: valuation and calibration with stochastic volatility
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• Pricing of geometric Asian options under Heston's stochastic volatility model
• Estimation of ask and bid prices for geometric Asian options
• Analytical valuation for geometric Asian options in illiquid markets
• An efficient algorithm to solve the geometric Asian power option price PDE under the stochastic volatility model

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