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Pricing perpetual American options under multiscale stochastic elasticity of variance

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  • Yoon, Ji-Hun

Abstract

This paper studies pricing the perpetual American options under a constant elasticity of variance type of underlying asset price model where the constant elasticity is replaced by a fast mean-reverting Ornstein–Ulenbeck process and a slowly varying diffusion process. By using a multiscale asymptotic analysis, we find the impact of the stochastic elasticity of variance on the option prices and the optimal exercise prices with respect to model parameters. Our results enhance the existing option price structures in view of flexibility and applicability through the market prices of elasticity risk.

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  • Yoon, Ji-Hun, 2015. "Pricing perpetual American options under multiscale stochastic elasticity of variance," Chaos, Solitons & Fractals, Elsevier, vol. 70(C), pages 14-26.
    • Handle: RePEc:eee:chsofr:v:70:y:2015:i:c:p:14-26
    DOI: 10.1016/j.chaos.2014.10.012
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    References listed on IDEAS

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    1. Fouque,Jean-Pierre & Papanicolaou,George & Sircar,Ronnie & Sølna,Knut, 2011. "Multiscale Stochastic Volatility for Equity, Interest Rate, and Credit Derivatives," Cambridge Books, Cambridge University Press, number 9780521843584.
    2. Jeong‐Hoon Kim & Ji‐Hun Yoon & Seok‐Hyon Yu, 2014. "Multiscale Stochastic Volatility with the Hull–White Rate of Interest," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 34(9), pages 819-837, September.
    3. Kim, Jeong-Hoon & Lee, Min-Ku & Sohn, So Young, 2014. "Investment timing under hybrid stochastic and local volatility," Chaos, Solitons & Fractals, Elsevier, vol. 67(C), pages 58-72.
    4. Cox, John C. & Ross, Stephen A., 1976. "The valuation of options for alternative stochastic processes," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 145-166.
    5. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
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    Cited by:

    1. Ballestra, Luca Vincenzo & Cecere, Liliana, 2016. "A numerical method to estimate the parameters of the CEV model implied by American option prices: Evidence from NYSE," Chaos, Solitons & Fractals, Elsevier, vol. 88(C), pages 100-106.
    2. Zaevski, Tsvetelin S., 2020. "Discounted perpetual game call options," Chaos, Solitons & Fractals, Elsevier, vol. 131(C).
    3. Deng, Guohe, 2020. "Pricing perpetual American floating strike lookback option under multiscale stochastic volatility model," Chaos, Solitons & Fractals, Elsevier, vol. 141(C).
    4. Yoon, Ji-Hun & Park, Chang-Rae, 2016. "Pricing turbo warrants under stochastic elasticity of variance," Chaos, Solitons & Fractals, Elsevier, vol. 88(C), pages 107-118.

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