PROBABILITY DISTRIBUTION AND OPTION PRICING FOR DRAWDOWN IN A STOCHASTIC VOLATILITY ENVIRONMENT

Kyo Yamamoto (), Seisho Sato () and Akihiko Takahashi
Additional contact information
Kyo Yamamoto: GCI Asset Management, Inc., 12F Chiyoda First Bldg, East, 3-8-1 Nishi Kanda, Chiyoda-ku, Tokyo 101-0065, Japan
Seisho Sato: Risk Analysis Research Center, Institute of Statistical Mathematics, 4-6-7 Minami-Azabu, Minato-ku, Tokyo 106-8569, Japan
Akihiko Takahashi: Graduate School of Economics, The University of Tokyo, 7-3-1 Hongo, Bunkyo-ku, Tokyo, 113-8654, Japan

International Journal of Theoretical and Applied Finance (IJTAF), 2010, vol. 13, issue 02, 335-354

Abstract: This paper studies the probability distribution and option pricing for drawdown in a stochastic volatility environment. Their analytical approximation formulas are derived by the application of a singular perturbation method (Fouque et al., 2000). The mathematical validity of the approximation is also proven. 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.

Keywords: Drawdown; stochastic voaltility; singular perturbation (search for similar items in EconPapers)
Date: 2010
References: View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
http://www.worldscientific.com/doi/abs/10.1142/S0219024910005796
Access to full text is restricted to subscribers

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:wsi:ijtafx:v:13:y:2010:i:02:n:s0219024910005796

Ordering information: This journal article can be ordered from

DOI: 10.1142/S0219024910005796

Access Statistics for this article

International Journal of Theoretical and Applied Finance (IJTAF) is currently edited by L P Hughston

More articles in International Journal of Theoretical and Applied Finance (IJTAF) from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().