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Pricing perpetual American floating strike lookback option under multiscale stochastic volatility model

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  • Deng, Guohe

Abstract

This paper considers valuation of the perpetual American floating strike lookback call option under a multiscale stochastic volatility model where the volatility of the underlying asset price is driven by two stochastic processes with one fast mean-reverting factor and one slowly varying factor. By introducing new variables for dimension reduction and using a multiscale asymptotic technique, closed-form pricing formula for the perpetual American lookback call option is obtained. Numerical examples are used to examine the impacts of the stochastic volatility on the option prices and the optimal exercise prices with respect to model parameters.

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  • Deng, Guohe, 2020. "Pricing perpetual American floating strike lookback option under multiscale stochastic volatility model," Chaos, Solitons & Fractals, Elsevier, vol. 141(C).
    • Handle: RePEc:eee:chsofr:v:141:y:2020:i:c:s0960077920308043
    DOI: 10.1016/j.chaos.2020.110411
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    More about this item

    Keywords

    Perpetual American lookback option; Multiscale stochastic volatility; Multiscale asymptotic technique; Nonlinear parabolic problem;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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