Barrier option pricing under the 2-hypergeometric stochastic volatility model

DOI10.1016/J.CAM.2017.06.034MaRDI QIDQ2406299zbMATH OpenOpenAlexFDO

Authors Rúben Sousa, Manuel Guerra, Ana Bela Cruzeiro

Publication date 27 September 2017

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

Full work available at URL https://arxiv.org/abs/1610.03230

zbMATH Keywords

asymptotic analysisfinanceoption pricing theoryregular perturbation methodstochastic volatility

Mathematics Subject Classification ID

Asymptotic expansions of solutions to PDEs (35C20) Applications of stochastic analysis (to PDEs, etc.) (60H30) Derivative securities (option pricing, hedging, etc.) (91G20)

Abstract: We investigate the pricing of financial options under the 2-hypergeometric stochastic volatility model. This is an analytically tractable model that reproduces the volatility smile and skew effects observed in empirical market data. Using a regular perturbation method from asymptotic analysis of partial differential equations, we derive an explicit and easily computable approximate formula for the pricing of barrier options under the 2-hypergeometric stochastic volatility model. The asymptotic convergence of the method is proved under appropriate regularity conditions, and a multi-stage method for improving the quality of the approximation is discussed. Numerical examples are also provided.

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Cited in

(18)

• An analytical approximation for single barrier options under stochastic volatility models
• Pricing external barrier options under a stochastic volatility model
• Hedging of options for jump-diffusion stochastic volatility models by Malliavin calculus
• Pricing collar options with stochastic volatility
• Double-barrier option pricing equations under extended geometric Brownian motion with bankruptcy risk
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• An asymptotic expansion formula for up-and-out barrier option price under stochastic volatility model
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• Pricing of geometric Asian power barrier options
• Option pricing and implied volatilities in a 2-hypergeometric stochastic volatility model

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