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The valuation of arithmetic Asian options with mean reversion and jump clustering

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  • Song, Shiyu

Abstract

It is known that the prices of many commodities exhibit mean reversion and are subject to jumps. Particularly, there is mounting empirical evidence that suggests the existence of clustered jumps. In this paper, we consider the valuation problem of arithmetic Asian options under a Hawkes jump diffusion model which captures both the mean reversion and jump clustering phenomena. We compute option prices by means of characteristic functions and Fourier-cosine series expansion. Numerical studies justify the validity and efficiency of our pricing method, and demonstrate the nonnegligible effects of mean reversion and jump clustering on Asian option prices.

Suggested Citation

  • Song, Shiyu, 2024. "The valuation of arithmetic Asian options with mean reversion and jump clustering," The North American Journal of Economics and Finance, Elsevier, vol. 70(C).
    • Handle: RePEc:eee:ecofin:v:70:y:2024:i:c:s1062940823001821
    DOI: 10.1016/j.najef.2023.102059
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    More about this item

    Keywords

    Asian option; Mean reversion; Jump clustering; Hawkes process;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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