Spectral Decomposition of Option Prices in Fast Mean-Reverting Stochastic Volatility Models
Using spectral decomposition techniques and singular perturbation theory, we develop a systematic method to approximate the prices of a variety of options in a fast mean-reverting stochastic volatility setting. Four examples are provided in order to demonstrate the versatility of our method. These include: European options, up-and-out options, double-barrier knock-out options, and options which pay a rebate upon hitting a boundary. For European options, our method is shown to produce option price approximations which are equivalent to those developed in .  Jean-Pierre Fouque, George Papanicolaou, and Sircar Ronnie. Derivatives in Financial Markets with Stochas- tic Volatility. Cambridge University Press, 2000.
|Date of creation:||Jul 2010|
|Date of revision:||Apr 2012|
|Publication status:||Published in SIAM J. Finan. Math. 2, (2011) pp. 665-691|
|Contact details of provider:|| Web page: http://arxiv.org/|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Eric Hillebrand, 2005. "Overlaying Time Scales in Financial Volatility Data," Econometrics 0501015, EconWPA.
- Alan L. Lewis, 2000. "Option Valuation under Stochastic Volatility," Option Valuation under Stochastic Volatility, Finance Press, number ovsv, December.
- Antoon Pelsser, 2000. "Pricing double barrier options using Laplace transforms," Finance and Stochastics, Springer, vol. 4(1), pages 95-104.
- 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.
When requesting a correction, please mention this item's handle: RePEc:arx:papers:1007.4361. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (arXiv administrators)
If references are entirely missing, you can add them using this form.