Probability Distribution and Option Pricing for Drawdown in a Stochastic Volatility Environment

Kyo Yamamoto, Seisho Sato and Akihiko Takahashi
Additional contact information
Kyo Yamamoto: Graduate School of Economics, University of Tokyo
Seisho Sato: Institute of Statistical Mathematics
Akihiko Takahashi: Faculty of Economics, University of Tokyo

No CIRJE-F-596, CIRJE F-Series from CIRJE, Faculty of Economics, University of Tokyo

Abstract: This paper studies the probability distribution and option pricing for drawdown in a stochastic volatility environment. We derive an analytical approximation formula for them by applying a singular perturbation method ([12]). Then, numerical examples show that the instantaneous correlation between the asset value and the volatility state crucially affects the probability distribution and option prices for drawdown.

Pages: 15pages
Date: 2008-10
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:tky:fseres:2008cf596

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