AN ACCURATE VALUATION OF ASIAN OPTIONS USING MOMENTS

G. Fusai () and A. Tagliani ()
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G. Fusai: Dipartimento SEMEQ, Università del Piemonte Orientale, via Lanino, 5, 28100 Novara, Italia
A. Tagliani: DISA, Università di Trento, via Inama, 1, 38100 Trento, Italia

International Journal of Theoretical and Applied Finance (IJTAF), 2002, vol. 05, issue 02, 147-169

Abstract: We propose a new method for evaluating fixed strike Asian options using moments. In particular we show that the density of the logarithm of the arithmetic average is uniquely determined from its moments. Resorting to the maximum entropy density, we show that the first four moments are sufficient to recover with great accuracy the true density of the average. Then the Asian option price is estimated with high accuracy. We compare the proposed method with others based on the computation of moments.

Keywords: Maximum entropy; moment problem; exotic options; Laplace transform; numerical invension; edgeworth approtimation (search for similar items in EconPapers)
Date: 2002
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Citations: View citations in EconPapers (9)

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DOI: 10.1142/S0219024902001389

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