Journal of the Korean Society for Industrial and Applied Mathematics

Korean Society for Industrial and Applied Mathematics (한국산업응용수학회)
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ARITHMETIC AVERAGE ASIAN OPTIONS WITH STOCHASTIC ELASTICITY OF VARIANCE

  • Received : 2016.05.13
  • Accepted : 2016.06.03
  • Published : 2016.06.25
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Abstract

This article deals with the pricing of Asian options under a constant elasticity of variance (CEV) model as well as a stochastic elasticity of variance (SEV) model. The CEV and SEV models are underlying asset price models proposed to overcome shortcomings of the constant volatility model. In particular, the SEV model is attractive because it can characterize the feature of volatility in risky situation such as the global financial crisis both quantitatively and qualitatively. We use an asymptotic expansion method to approximate the no-arbitrage price of an arithmetic average Asian option under both CEV and SEV models. Subsequently, the zero and non-zero constant leverage effects as well as stochastic leverage effects are compared with each other. Lastly, we investigate the SEV correction effects to the CEV model for the price of Asian options.

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References

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