Most-likely-path in Asian option pricing under local volatility models
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Publication:4584697
Abstract: This article addresses the problem of approximating the price of options on discrete and continuous arithmetic average of the underlying, i.e. discretely and continuously monitored Asian options, in local volatility models. A path-integral-type expression for option prices is obtained using a Brownian bridge representation for the transition density between consecutive sampling times and a Laplace asymptotic formula. In the limit where the sampling time window approaches zero, the option price is found to be approximated by a constrained variational problem on paths in time-price space. We refer to the optimizing path as the most-likely path (MLP). Approximation for the implied normal volatility follows accordingly. The small-time asymptotics and the existence of the MLP are also recovered rigorously using large deviation theory.
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Cited in
(8)- Asymptotics for short maturity Asian options in jump-diffusion models with local volatility
- Approximations for Asian options in local volatility models
- Short Maturity Asian Options in Local Volatility Models
- Volatility and volatility-linked derivatives: estimation, modeling, and pricing
- The heat-kernel most-likely-path approximation
- Short maturity forward start Asian options in local volatility models
- Sensitivities of Asian options in the Black-Scholes model
- SUBLEADING CORRECTION TO THE ASIAN OPTIONS VOLATILITY IN THE BLACK–SCHOLES MODEL
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