Pricing Average and Spread Options under Local-Stochastic Volatility Jump-Diffusion Models

Kenichiro Shiraya and Akihiko Takahashi
Additional contact information
Kenichiro Shiraya: Faculty of Economics, The University of Tokyo
Akihiko Takahashi: Faculty of Economics, The University of Tokyo

No CIRJE-F-980, CIRJE F-Series from CIRJE, Faculty of Economics, University of Tokyo

Abstract: This paper presents a new approximation formula for pricing multi-dimensional discretely monitored average options in a local-stochastic volatility (LSV) model with jumps by applying an asymptotic expansion technique. Moreover, it provides a justification of the approximation method with some asymptotic error estimates for general payoff functions. Particularly, our model includes local volatility functions and jump components in the underlying asset price as well as its volatility processes. To the best of our knowledge, the proposed approximation is the first one which achieves analytic approximations for the average option prices in this environment. In numerical experiments, by employing several models, we provide approximate prices for the listed average and calendar spread options on the WTI futures based on the parameters through calibration to the listed (plain-vanilla) futures options prices. Then, we compare those with the CME settlement prices, which confirms the validity of the method. Moreover, we show that the LSV with jumps model is able to replicate consistently and precisely listed futures option, calendar spread option and average option prices with common parameters.

Pages: 　46 pages
Date: 2015-07
New Economics Papers: this item is included in nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.cirje.e.u-tokyo.ac.jp/research/dp/2015/2015cf980.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:tky:fseres:2015cf980

Access Statistics for this paper

More papers in CIRJE F-Series from CIRJE, Faculty of Economics, University of Tokyo Contact information at EDIRC.
Bibliographic data for series maintained by CIRJE administrative office ().