Closed-Form Approximation of Timer Option Prices under General Stochastic Volatility Models

Minqiang Li and Fabio Mercurio

MPRA Paper from University Library of Munich, Germany

Abstract: We develop an asymptotic expansion technique for pricing timer options under general stochastic volatility models around small volatility of variance. Closed-form approximation formulas have been obtained for the Heston model and the 3/2-model. The approximation has an easy-to-understand Black-Scholes-like form and many other attractive properties. Numerical analysis shows that the approximation formulas are very fast and accurate.

Keywords: Timer Option; Closed-Form Approximation; Perturbation (search for similar items in EconPapers)
JEL-codes: C02 G12 (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-ore
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:47465

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