Probability Distribution and Option Pricing for Drawdown in a Stochastic Volatility Environment ( Revised in May 2009; Electronic version of an article will be published in "International Journal of Theoretical and Applied Finance". [copyright world Scientific Publishing Company][http://www.worldscinet.com/ijtaf/] )

Kyo Yamamoto, Seisho Sato and Akihiko Takahashi
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Kyo Yamamoto: Graduate School of Economics, University of Tokyo
Seisho Sato: Institute of Statistical Mathematics
Akihiko Takahashi: Faculty of Economics, University of Tokyo

No CARF-F-138, CARF F-Series from Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo

Abstract: This paper studies the probability distribution and option pricing for drawdown in a stochastic volatility environment. Their analytical approximation formulas are derived by the application of a singular perturbation method (Fouque et al. [7]). The mathematical validity of the approximation is also proven. Then, numerical examples show that the instantaneous correlation between the asset value and the volatility state crucially affects the probability distribution and option prices for drawdown.

Pages: 15 pages
Date: 2008-10
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Persistent link: https://EconPapers.repec.org/RePEc:cfi:fseres:cf138

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