Pricing of Volume-Weighted Average Options: Analytical Approximations and Numerical Results

Alexander A. Novikov (), Timothy G. Ling () and Nino Kordzakhia ()
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Alexander A. Novikov: University of Technology
Timothy G. Ling: University of Technology
Nino Kordzakhia: Macquarie University

A chapter in Inspired by Finance, 2014, pp 461-474 from Springer

Abstract: Abstract The volume weighted average price (VWAP) over rolling number of days in the averaging period is used as a benchmark price by market participants and can be regarded as an estimate for the price that a passive trader will pay to purchase securities in a market. The VWAP is commonly used in brokerage houses as a quantitative trading tool and also appears in Australian taxation law to specify the price of share-buybacks of publically-listed companies. Most of the existing literature on VWAP focuses on strategies and algorithms to acquire market securities at a price as close as possible to VWAP. In our setup the volume process is modeled via a shifted squared Ornstein-Uhlenbeck process and a geometric Brownian motion is used to model the asset price. We derive the analytical formulae for moments of VWAP and then use the moment matching approach to approximate a distribution of VWAP. Numerical results for moments of VWAP and call-option prices have been verified by Monte Carlo simulations.

Keywords: Asian option; Moment matching; Volume process; Geometric Lévy model; 91G20 (search for similar items in EconPapers)
Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-319-02069-3_21

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DOI: 10.1007/978-3-319-02069-3_21

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