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A uniform asymptotic expansion for stochastic volatility model in pricing multi‐asset European options

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  • Yansheng Ma
  • Yong Li

Abstract

In this paper, we consider a stochastic volatility model for pricing multi‐asset European options that are widely used in the real world, under the assumption that the volatilities are driven by different OU processes. Using the singular perturbation method for multi‐parameter and the boundary layer theory, we derive a uniform asymptotic expansion for the option prices, as well as the uniform error estimates. Copyright © 2011 John Wiley & Sons, Ltd.

Suggested Citation

  • Yansheng Ma & Yong Li, 2012. "A uniform asymptotic expansion for stochastic volatility model in pricing multi‐asset European options," Applied Stochastic Models in Business and Industry, John Wiley & Sons, vol. 28(4), pages 324-341, July.
    • Handle: RePEc:wly:apsmbi:v:28:y:2012:i:4:p:324-341
    DOI: 10.1002/asmb.880
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    References listed on IDEAS

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    1. Fausto Gozzi & Tiziano Vargiolu, 2002. "Superreplication of European multiasset derivatives with bounded stochastic volatility," Mathematical Methods of Operations Research, Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 55(1), pages 69-91, March.
    2. G. N. Milstein & Eckhard Platen & H. Schurz, 1998. "Balanced Implicit Methods for Stiff Stochastic Systems," Published Paper Series 1998-1, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
    3. Hull, John C & White, Alan D, 1987. "The Pricing of Options on Assets with Stochastic Volatilities," Journal of Finance, American Finance Association, vol. 42(2), pages 281-300, June.
    4. Wong, Hoi Ying & Chan, Chun Man, 2007. "Lookback options and dynamic fund protection under multiscale stochastic volatility," Insurance: Mathematics and Economics, Elsevier, vol. 40(3), pages 357-385, May.
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