Most-likely-path in Asian option pricing under local volatility models

DOI10.1142/S0219024918500292zbMATH Open1396.91714arXiv1706.02408OpenAlexW2964269391WikidataQ129778322 ScholiaQ129778322MaRDI QIDQ4584697FDOQ4584697

Louis-Pierre Arguin, Tai-Ho Wang, Nien-Lin Liu

Publication date: 4 September 2018

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

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.

Full work available at URL: https://arxiv.org/abs/1706.02408

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zbMATH Keywords

asymptotic expansionexotic optionlarge deviation theoryAsian option pricingmost-likely-path

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Large deviations (60F10) Numerical methods (including Monte Carlo methods) (91G60)

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Cited In (6)

• Asymptotics for short maturity Asian options in jump-diffusion models with local volatility
• SENSITIVITIES OF ASIAN OPTIONS IN THE BLACK–SCHOLES MODEL
• Short Maturity Forward Start Asian Options in Local Volatility Models
• Short Maturity Asian Options in Local Volatility Models
• Volatility and volatility-linked derivatives: estimation, modeling, and pricing
• SUBLEADING CORRECTION TO THE ASIAN OPTIONS VOLATILITY IN THE BLACK–SCHOLES MODEL

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