Pricing Arithmetic Asian Options under Hybrid Stochastic and Local Volatility
Recently, hybrid stochastic and local volatility models have become an industry standard for the pricing of derivatives and other problems in finance. In this study, we use a multiscale stochastic volatility model incorporated by the constant elasticity of variance to understand the price structure...
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| Format: | Article |
| Language: | English |
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Wiley
2014-01-01
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| Series: | Journal of Applied Mathematics |
| Online Access: | http://dx.doi.org/10.1155/2014/784386 |
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| _version_ | 1832563714156396544 |
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| author | Min-Ku Lee Jeong-Hoon Kim Kyu-Hwan Jang |
| author_facet | Min-Ku Lee Jeong-Hoon Kim Kyu-Hwan Jang |
| author_sort | Min-Ku Lee |
| collection | DOAJ |
| description | Recently, hybrid stochastic and local volatility models have become an industry standard for the pricing of derivatives and other problems in finance. In this study, we use a multiscale stochastic volatility model incorporated by the constant elasticity of variance to understand the price structure of continuous arithmetic average Asian options. The multiscale partial differential equation for the option price is approximated by a couple of single scale partial differential equations. In terms of the elasticity parameter governing the leverage effect, a correction to the stochastic volatility model is made for more efficient pricing and hedging of Asian options. |
| format | Article |
| id | doaj-art-7f98c330f16740419db236010ba35d19 |
| institution | Kabale University |
| issn | 1110-757X 1687-0042 |
| language | English |
| publishDate | 2014-01-01 |
| publisher | Wiley |
| record_format | Article |
| series | Journal of Applied Mathematics |
| spelling | doaj-art-7f98c330f16740419db236010ba35d192025-02-03T01:12:49ZengWileyJournal of Applied Mathematics1110-757X1687-00422014-01-01201410.1155/2014/784386784386Pricing Arithmetic Asian Options under Hybrid Stochastic and Local VolatilityMin-Ku Lee0Jeong-Hoon Kim1Kyu-Hwan Jang2Department of Mathematics, Sungkyunkwan University, Suwon, Gyeonggi-do 440-746, Republic of KoreaDepartment of Mathematics, Yonsei University, Seoul 120-749, Republic of KoreaDepartment of Mathematics, Yonsei University, Seoul 120-749, Republic of KoreaRecently, hybrid stochastic and local volatility models have become an industry standard for the pricing of derivatives and other problems in finance. In this study, we use a multiscale stochastic volatility model incorporated by the constant elasticity of variance to understand the price structure of continuous arithmetic average Asian options. The multiscale partial differential equation for the option price is approximated by a couple of single scale partial differential equations. In terms of the elasticity parameter governing the leverage effect, a correction to the stochastic volatility model is made for more efficient pricing and hedging of Asian options.http://dx.doi.org/10.1155/2014/784386 |
| spellingShingle | Min-Ku Lee Jeong-Hoon Kim Kyu-Hwan Jang Pricing Arithmetic Asian Options under Hybrid Stochastic and Local Volatility Journal of Applied Mathematics |
| title | Pricing Arithmetic Asian Options under Hybrid Stochastic and Local Volatility |
| title_full | Pricing Arithmetic Asian Options under Hybrid Stochastic and Local Volatility |
| title_fullStr | Pricing Arithmetic Asian Options under Hybrid Stochastic and Local Volatility |
| title_full_unstemmed | Pricing Arithmetic Asian Options under Hybrid Stochastic and Local Volatility |
| title_short | Pricing Arithmetic Asian Options under Hybrid Stochastic and Local Volatility |
| title_sort | pricing arithmetic asian options under hybrid stochastic and local volatility |
| url | http://dx.doi.org/10.1155/2014/784386 |
| work_keys_str_mv | AT minkulee pricingarithmeticasianoptionsunderhybridstochasticandlocalvolatility AT jeonghoonkim pricingarithmeticasianoptionsunderhybridstochasticandlocalvolatility AT kyuhwanjang pricingarithmeticasianoptionsunderhybridstochasticandlocalvolatility |