Pricing Barrier and Average Options under Stochastic Volatility Environment

Kenichiro Shiraya, Akihiko Takahashi and Masashi Toda
Additional contact information
Kenichiro Shiraya: Mizuho-DL Financial Technology Co.,Ltd.
Akihiko Takahashi: Faculty of Economics, University of Tokyo
Masashi Toda: Graduate School of Economics, University of Tokyo

No CARF-F-176, CARF F-Series from Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo

Abstract: This paper proposes a new approximation method of pricing barrier and average options under stochastic volatility environment by applying an asymptotic expansion approach. In particular, a high-order expansion scheme for general multi-dimensional diffusion processes is effectively applied. Moreover, the paper combines a static hedging method with the asymptotic expansion method for pricing barrier options. Finally, numerical examples show that the fourth or fifth-order asymptotic expansion scheme provides sufficiently accurate approximations under the lambda-SABR and SABR models.

Pages: 22 pages
Date: 2009-10, Revised 2010-05
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Persistent link: https://EconPapers.repec.org/RePEc:cfi:fseres:cf176

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