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Pricing of Arithmetic Asian Options under Stochastic Volatility Dynamics: Overcoming the Risks of High-Frequency Trading

Author

Listed:
  • Chih-Chen Hsu

    (Department of Business Administration, Soochow University, Taipei 100006, Taiwan)

  • Chung-Gee Lin

    (Department of Financial Engineering and Actuarial Mathematics, Soochow University, Taipei 100006, Taiwan
    Taiwan/Pervasive Artificial Intelligence Research (PAIR) Labs, Taipei 106031, Taiwan)

  • Tsung-Jung Kuo

    (Department of Financial Engineering and Actuarial Mathematics, Soochow University, Taipei 100006, Taiwan)

Abstract

This research extended the model developed by Hull and White by integrating Taylor-series expansion into the model for deriving approximate analytical solutions for stochastic volatility forward-starting Asian options. Numerical experiments were performed to compare the proposed model with the Monte Carlo model over numerous simulations and demonstrated that the developed model has a pricing accuracy greater than 99%. Furthermore, the computation time was approximately 10 −5 s for each simulation. The model’s outstanding computational performance demonstrates its capability to address the challenges of high-frequency trading.

Suggested Citation

  • Chih-Chen Hsu & Chung-Gee Lin & Tsung-Jung Kuo, 2020. "Pricing of Arithmetic Asian Options under Stochastic Volatility Dynamics: Overcoming the Risks of High-Frequency Trading," Mathematics, MDPI, vol. 8(12), pages 1-16, December.
    • Handle: RePEc:gam:jmathe:v:8:y:2020:i:12:p:2251-:d:465383
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    References listed on IDEAS

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