Asymptotic expansion for pricing options for a mean-reverting asset with multiscale stochastic volatility

Mei Choi CHIU; Yu Wai LO; Hoi Ying WONG

doi:10.1016/j.orl.2011.06.002

Asymptotic expansion for pricing options for a mean-reverting asset with multiscale stochastic volatility

Mei Choi CHIU
, Yu Wai LO
, Hoi Ying WONG

Department of Mathematics and Information Technology (MIT)

Research output: Contribution to journal › Articles › peer-review

15 Citations (Scopus)

Abstract

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.

Original language	English
Pages (from-to)	289-295
Journal	Operations Research Letters
Volume	39
Issue number	4
DOIs	https://doi.org/10.1016/j.orl.2011.06.002
Publication status	Published - Jul 2011

Keywords

Option pricing
Mean reversion
Multiscale asymptotic
Stochastic volatility

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10.1016/j.orl.2011.06.002

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Asymptotic expansion for pricing options for a mean-reverting asset with multiscale stochastic volatility

Abstract

Keywords

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