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An Accurate Valuation Of Asian Options Using Moments

Author

Listed:
  • G. FUSAI

    (Dipartimento SEMEQ, Università del Piemonte Orientale, via Lanino, 5, 28100 Novara, Italia)

  • A. TAGLIANI

    (DISA, Università di Trento, via Inama, 1, 38100 Trento, Italia)

Abstract

We propose a new method for evaluating fixed strike Asian options using moments. In particular we show that the density of the logarithm of the arithmetic average is uniquely determined from its moments. Resorting to the maximum entropy density, we show that the first four moments are sufficient to recover with great accuracy the true density of the average. Then the Asian option price is estimated with high accuracy. We compare the proposed method with others based on the computation of moments.

Suggested Citation

  • G. Fusai & A. Tagliani, 2002. "An Accurate Valuation Of Asian Options Using Moments," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 5(02), pages 147-169.
    • Handle: RePEc:wsi:ijtafx:v:05:y:2002:i:02:n:s0219024902001389
    DOI: 10.1142/S0219024902001389
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    Citations

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    Cited by:

    1. Kailin Ding & Zhenyu Cui & Xiaoguang Yang, 2023. "Pricing arithmetic Asian and Amerasian options: A diffusion operator integral expansion approach," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 43(2), pages 217-241, February.
    2. Lemmens, D. & Liang, L.Z.J. & Tempere, J. & De Schepper, A., 2010. "Pricing bounds for discrete arithmetic Asian options under Lévy models," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 389(22), pages 5193-5207.
    3. Damir Filipović & Sander Willems, 2020. "A term structure model for dividends and interest rates," Mathematical Finance, Wiley Blackwell, vol. 30(4), pages 1461-1496, October.
    4. Pagliarani, S. & Pascucci, A. & Pignotti, M., 2017. "Intrinsic expansions for averaged diffusion processes," Stochastic Processes and their Applications, Elsevier, vol. 127(8), pages 2560-2585.
    5. Fusai, Gianluca & Meucci, Attilio, 2008. "Pricing discretely monitored Asian options under Levy processes," Journal of Banking & Finance, Elsevier, vol. 32(10), pages 2076-2088, October.
    6. Keng‐Hsin Lo & Kehluh Wang & Ming‐Feng Hsu, 2008. "Pricing European Asian options with skewness and kurtosis in the underlying distribution," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 28(6), pages 598-616, June.
    7. Allen Abrahamson, 2003. "Efficient Path-Dependent Valuation Using Lattices: Fixed and Floating Strike Asian Options," Finance 0305005, University Library of Munich, Germany.
    8. Silvia Lavagnini, 2021. "Pricing Asian Options with Correlators," Papers 2104.11684, arXiv.org.

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