A Remark on a Singular Perturbation Method for Option Pricing under a Stochastic Volatility Model ( Forthcoming in "Asia-Pacific Financial Markets". )

Kyo Yamamoto and Akihiko Takahashi
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Kyo Yamamoto: Graduate School of Economics, University of Tokyo
Akihiko Takahashi: Faculty of Economics, University of Tokyo

No CARF-F-139, CARF F-Series from Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo

Abstract: This paper studies the accuracy of a singular perturbation method for option pricing under a stochastic volatility model ([8]). First, through numerical experiments we confirm that the first order approximation provides sufficiently accurate option prices in a fast mean-reversion case of the volatility process while it does not in a non-fast mean-reversion case. Then, we derive the second order approximation formula and examine the improvement of the approximation.

Pages: 14 pages
Date: 2008-10
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:cfi:fseres:cf139

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