Pricing geometric Asian rainbow options under fractional Brownian motion

Lu Wang, Rong Zhang, Lin Yang, Yang Su and Feng Ma

Physica A: Statistical Mechanics and its Applications, 2018, vol. 494, issue C, 8-16

Abstract: In this paper, we explore the pricing of the assets of Asian rainbow options under the condition that the assets have self-similar and long-range dependence characteristics. Based on the principle of no arbitrage, stochastic differential equation, and partial differential equation, we obtain the pricing formula for two-asset rainbow options under fractional Brownian motion. Next, our Monte Carlo simulation experiments show that the derived pricing formula is accurate and effective. Finally, our sensitivity analysis of the influence of important parameters, such as the risk-free rate, Hurst exponent, and correlation coefficient, on the prices of Asian rainbow options further illustrate the rationality of our pricing model.

Keywords: Fractional Brownian motion; Rainbow options; Asian options; Monte Carlo simulation (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:494:y:2018:i:c:p:8-16

DOI: 10.1016/j.physa.2017.11.055

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