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Pricing Arithmetic Asian Options under Hybrid Stochastic and Local Volatility

Author

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  • Min-Ku Lee
  • Jeong-Hoon Kim
  • Kyu-Hwan Jang

Abstract

Recently, hybrid stochastic and local volatility models have become an industry standard for the pricing of derivatives and other problems in finance. In this study, we use a multiscale stochastic volatility model incorporated by the constant elasticity of variance to understand the price structure of continuous arithmetic average Asian options. The multiscale partial differential equation for the option price is approximated by a couple of single scale partial differential equations. In terms of the elasticity parameter governing the leverage effect, a correction to the stochastic volatility model is made for more efficient pricing and hedging of Asian options.

Suggested Citation

  • Min-Ku Lee & Jeong-Hoon Kim & Kyu-Hwan Jang, 2014. "Pricing Arithmetic Asian Options under Hybrid Stochastic and Local Volatility," Journal of Applied Mathematics, John Wiley & Sons, vol. 2014(1).
    • Handle: RePEc:wly:jnljam:v:2014:y:2014:i:1:n:784386
    DOI: 10.1155/2014/784386
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    References listed on IDEAS

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    Cited by:

    1. Florian Aichinger & Sascha Desmettre, 2025. "Pricing of geometric Asian options in the Volterra-Heston model," Review of Derivatives Research, Springer, vol. 28(1), pages 1-30, April.
    2. Michele Azzone & Roberto Baviera, 2024. "Short-time implied volatility of additive normal tempered stable processes," Annals of Operations Research, Springer, vol. 336(1), pages 93-126, May.
    3. Min-Ku Lee & Ji-Hun Yoon & Jeong-Hoon Kim & Sun-Hwa Cho, 2014. "Turbo Warrants under Hybrid Stochastic and Local Volatility," Abstract and Applied Analysis, John Wiley & Sons, vol. 2014(1).

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