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Asian Option Pricing under Uncertain Volatility Model

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  • Yuecai Han
  • Chunyang Liu

Abstract

In this paper, we study the asymptotic behavior of Asian option prices in the worst case scenario under an uncertain volatility model. We give a procedure to approximate the Asian option prices with a small volatility interval. By imposing additional conditions on the boundary condition and cutting the obtained Black-Scholes-Barenblatt equation into two Black-Scholes-like equations, we obtain an approximation method to solve the fully nonlinear PDE.

Suggested Citation

  • Yuecai Han & Chunyang Liu, 2018. "Asian Option Pricing under Uncertain Volatility Model," Papers 1808.00656, arXiv.org.
    • Handle: RePEc:arx:papers:1808.00656
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    References listed on IDEAS

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    4. Heston, Steven L, 1993. "A Closed-Form Solution for Options with Stochastic Volatility with Applications to Bond and Currency Options," The Review of Financial Studies, Society for Financial Studies, vol. 6(2), pages 327-343.
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    6. Dokuchaev, Nikolai G. & Savkin, Andrey V., 1998. "The pricing of options in a financial market model with transaction costs and uncertain volatility," Journal of Multinational Financial Management, Elsevier, vol. 8(2-3), pages 353-364, September.
    7. T. J. Lyons, 1995. "Uncertain volatility and the risk-free synthesis of derivatives," Applied Mathematical Finance, Taylor & Francis Journals, vol. 2(2), pages 117-133.
    8. Rama Cont, 2006. "Model uncertainty and its impact on the pricing of derivative instruments," Post-Print halshs-00002695, HAL.
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