Effective and simple VWAP options pricing model

DOI10.1142/S0219024914500368zbMATH Open1298.91157arXiv1407.7315OpenAlexW2029464660MaRDI QIDQ2929372FDOQ2929372

Authors: Alexander Buryak, Ivan Guo 

Publication date: 12 November 2014

Published in: International Journal of Theoretical and Applied Finance (Search for Journal in Brave)

Abstract: Volume weighted average price (VWAP) options are a popular security type in many countries, but despite their popularity very few pricing models have been developed so far for VWAP options. This can be explained by the fact that the VWAP pricing problem is set in an incomplete market since there is no underlying with which to hedge the volume risk, and hence there is no uniquely defined price. Any price, which is obtained will include a market price of volume risk which must be determined from the corresponding volume statistics. Our analysis strongly supports the hypothesis that the empirical volume statistics of ASX equities can be described reasonably well by fitted gamma distributions. Based on this observation we suggest a simple gamma process-based model that allows for the exact analytic pricing of VWAP options in a rather straightforward way.

Full work available at URL: https://arxiv.org/abs/1407.7315

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zbMATH Keywords

volume weightingequity optionanalytic pricing

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Applications of statistics to actuarial sciences and financial mathematics (62P05) Statistical methods; risk measures (91G70)

Cites Work

• Title not available (Why is that?)
• The value of an Asian option
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• Numerical recipes. The art of scientific computing.
• Valuing Asian and Portfolio Options by Conditioning on the Geometric Mean Price
• A MOMENT MATCHING APPROACH TO THE VALUATION OF A VOLUME WEIGHTED AVERAGE PRICE OPTION
• On-line VWAP Trading Strategies

Cited In (4)

• Pricing of Asian-type and basket options via bounds
• Pricing of volume-weighted average options: analytical approximations and numerical results
• A MOMENT MATCHING APPROACH TO THE VALUATION OF A VOLUME WEIGHTED AVERAGE PRICE OPTION
• An analytical approximation for pricing VWAP options

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