Geometric Asian Options Pricing under the Double Heston Stochastic Volatility Model with Stochastic Interest Rate

This paper presents an extension of double Heston stochastic volatility model by incorporating stochastic interest rates and derives explicit solutions for the prices of the continuously monitored fixed and floating strike geometric Asian options. The discounted joint characteristic function of the...

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Main Authors: Yanhong Zhong, Guohe Deng
Format: Article
Language:English
Published: Wiley 2019-01-01
Series:Complexity
Online Access:http://dx.doi.org/10.1155/2019/4316272
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author Yanhong Zhong
Guohe Deng
author_facet Yanhong Zhong
Guohe Deng
author_sort Yanhong Zhong
collection DOAJ
description This paper presents an extension of double Heston stochastic volatility model by incorporating stochastic interest rates and derives explicit solutions for the prices of the continuously monitored fixed and floating strike geometric Asian options. The discounted joint characteristic function of the log-asset price and its log-geometric mean value is computed by using the change of numeraire and the Fourier inversion transform technique. We also provide efficient approximated approach and analyze several effects on option prices under the proposed model. Numerical examples show that both stochastic volatility and stochastic interest rate have a significant impact on option values, particularly on the values of longer term options. The proposed model is suitable for modeling the longer time real-market changes and managing the credit risks.
format Article
id doaj-art-2f4dceb983d84e3683df637ab19cdd06
institution Kabale University
issn 1076-2787
1099-0526
language English
publishDate 2019-01-01
publisher Wiley
record_format Article
series Complexity
spelling doaj-art-2f4dceb983d84e3683df637ab19cdd062025-02-03T06:13:05ZengWileyComplexity1076-27871099-05262019-01-01201910.1155/2019/43162724316272Geometric Asian Options Pricing under the Double Heston Stochastic Volatility Model with Stochastic Interest RateYanhong Zhong0Guohe Deng1College of Mathematics and Statistics, Guangxi Normal University, Guilin 541004, ChinaCollege of Mathematics and Statistics, Guangxi Normal University, Guilin 541004, ChinaThis paper presents an extension of double Heston stochastic volatility model by incorporating stochastic interest rates and derives explicit solutions for the prices of the continuously monitored fixed and floating strike geometric Asian options. The discounted joint characteristic function of the log-asset price and its log-geometric mean value is computed by using the change of numeraire and the Fourier inversion transform technique. We also provide efficient approximated approach and analyze several effects on option prices under the proposed model. Numerical examples show that both stochastic volatility and stochastic interest rate have a significant impact on option values, particularly on the values of longer term options. The proposed model is suitable for modeling the longer time real-market changes and managing the credit risks.http://dx.doi.org/10.1155/2019/4316272
spellingShingle Yanhong Zhong
Guohe Deng
Geometric Asian Options Pricing under the Double Heston Stochastic Volatility Model with Stochastic Interest Rate
Complexity
title Geometric Asian Options Pricing under the Double Heston Stochastic Volatility Model with Stochastic Interest Rate
title_full Geometric Asian Options Pricing under the Double Heston Stochastic Volatility Model with Stochastic Interest Rate
title_fullStr Geometric Asian Options Pricing under the Double Heston Stochastic Volatility Model with Stochastic Interest Rate
title_full_unstemmed Geometric Asian Options Pricing under the Double Heston Stochastic Volatility Model with Stochastic Interest Rate
title_short Geometric Asian Options Pricing under the Double Heston Stochastic Volatility Model with Stochastic Interest Rate
title_sort geometric asian options pricing under the double heston stochastic volatility model with stochastic interest rate
url http://dx.doi.org/10.1155/2019/4316272
work_keys_str_mv AT yanhongzhong geometricasianoptionspricingunderthedoublehestonstochasticvolatilitymodelwithstochasticinterestrate
AT guohedeng geometricasianoptionspricingunderthedoublehestonstochasticvolatilitymodelwithstochasticinterestrate