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Variance Reduction for Asian Options under a General Model Framework

Author

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  • Kemal Dinçer Dingeç
  • Halis Sak
  • Wolfgang Hörmann

Abstract

We present a new variance reduction method for Asian options under a general model framework. The three special cases we consider are Lévy processes, Heston stochastic volatility, and regime switching models. The proposed method combines a very effective control variate with conditional Monte Carlo. While the control variate can be used for any model allowing the numerical computation of the multivariate characteristic function of the log-return vector, conditional Monte Carlo is based on the unified representation of the three models. Computational results confirm that the new method performs better than available control variate methods.

Suggested Citation

  • Kemal Dinçer Dingeç & Halis Sak & Wolfgang Hörmann, 2015. "Variance Reduction for Asian Options under a General Model Framework," Review of Finance, European Finance Association, vol. 19(2), pages 907-949.
    • Handle: RePEc:oup:revfin:v:19:y:2015:i:2:p:907-949.
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    File URL: http://hdl.handle.net/10.1093/rof/rfu005
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    Cited by:

    1. Shiraya, Kenichiro & Takahashi, Akihiko, 2017. "A general control variate method for multi-dimensional SDEs: An application to multi-asset options under local stochastic volatility with jumps models in finance," European Journal of Operational Research, Elsevier, vol. 258(1), pages 358-371.
    2. Geon Ho Choe & Minseok Kim, 2021. "Closed‐form lower bounds for the price of arithmetic average Asian options by multiple conditioning," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 41(12), pages 1916-1932, December.
    3. J. Lars Kirkby & Duy Nguyen, 2020. "Efficient Asian option pricing under regime switching jump diffusions and stochastic volatility models," Annals of Finance, Springer, vol. 16(3), pages 307-351, September.

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