Analytical pricing of discrete arithmetic Asian options under generalized CIR process with time change

Zhigang Tong and Allen Liu ()
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Zhigang Tong: Department of Mathematics and Statistics, University of Ottawa, 585 King Edward, Ottawa, Ontario, K1N 6N5, Canada
Allen Liu: #x2020;Model Validation, Enterprise Risk and Portfolio Management, Bank of Montreal, 27th Floor, First Canadian Place, Toronto, Ontario, M5X 1A3, Canada

International Journal of Financial Engineering (IJFE), 2018, vol. 05, issue 01, 1-21

Abstract: Starting from CIR process, we build a new model for pricing discrete arithmetic Asian options with nonlinear transformation and stochastic time change. The new model introduces the nonlinearity in both drift and diffusion components of the underlying process and allows for flexible jump processes. We are able to derive the recursive formula for the moment generating function of average price by employing the eigenfunction expansion technique. The Asian option prices can then be implemented through a Fourier transform. We also investigate the sensitivities of option prices with respect to the parameters of the new model.

Keywords: Discrete arithmetic Asian options; stochastic time change; nonlinear transformation; eigenfunction expansion; Lévy subordinator; Fourier transform (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (4)

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DOI: 10.1142/S2424786318500020

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