Numerical Valuation of Asian Options with Higher Moments in the Underlying Distribution

Cheng-Few Lee (), Hong-Yi Chen () and John Lee ()
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Cheng-Few Lee: Rutgers University, Department of Finance and Economics, Rutgers Business School
Hong-Yi Chen: National Chengchi University, Department of Finance
John Lee: Center for PBBEF Research

Chapter Chapter 19 in Financial Econometrics, Mathematics and Statistics, 2019, pp 491-515 from Springer

Abstract: Abstract In this chapter, we develop a modified Edgeworth binomial modelEdgeworth binomial model with higher moment consideration for pricing European or American-Asian optionsAsian options. If the number of the time steps increases, our numerical algorithm is as precise as that of Chalasani et al. (1999), with underlying distribution for benchmark comparison. If the underlying distribution displays a negative skewness and leptokurtosis, as often observed for stock index returns, our estimates are better and very similar to the benchmarks in Hull and White (1993). The results show that our modified Edgeworth binomial modelEdgeworth binomial model can value European and American-Asian optionsAsian options with greater accuracy and speed given higher moments in their underlying distribution.

Keywords: American option; Asian options; Edgeworth binomial model; European option; Lognormal distribution; Lower bound; Numerical analysis; Upper bound (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-1-4939-9429-8_19

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DOI: 10.1007/978-1-4939-9429-8_19

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