Pricing of Arithmetic Asian Options under Stochastic Volatility Dynamics: Overcoming the Risks of High-Frequency Trading

Chih-Chen Hsu, Chung-Gee Lin and Tsung-Jung Kuo
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Chih-Chen Hsu: Department of Business Administration, Soochow University, Taipei 100006, Taiwan
Chung-Gee Lin: Department of Financial Engineering and Actuarial Mathematics, Soochow University, Taipei 100006, Taiwan
Tsung-Jung Kuo: Department of Financial Engineering and Actuarial Mathematics, Soochow University, Taipei 100006, Taiwan

Mathematics, 2020, vol. 8, issue 12, 1-16

Abstract: This research extended the model developed by Hull and White by integrating Taylor-series expansion into the model for deriving approximate analytical solutions for stochastic volatility forward-starting Asian options. Numerical experiments were performed to compare the proposed model with the Monte Carlo model over numerous simulations and demonstrated that the developed model has a pricing accuracy greater than 99%. Furthermore, the computation time was approximately 10 −5 s for each simulation. The model’s outstanding computational performance demonstrates its capability to address the challenges of high-frequency trading.

Keywords: Asian option; Taylor series expansion technique; forward starting; high-frequency trading; stochastic volatility (search for similar items in EconPapers)
JEL-codes: C (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (1)

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