This work investigates the valuation of options when the underlying asset follows a mean-reverting log-normal process with a stochastic volatility that is driven by two stochastic processes with one persistent factor and one fast mean-reverting factor. Semi-analytical pricing formulas for European options are derived by means of multiscale asymptotic techniques. Numerical examples demonstrate the use of the model and the quality of the numerical scheme. Copyright © 2011 Elsevier B.V. All rights reserved.
CitationChiu, M. C., Lo, Y. W., & Wong, H. Y (2011). Asymptotic expansion for pricing options for a mean-reverting asset with multiscale stochastic volatility. Operations Research Letters, 39(4), 289-295. doi: 10.1016/j.orl.2011.06.002
- Option pricing
- Mean reversion
- Multiscale asymptotic
- Stochastic volatility