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Effective and simple VWAP option pricing model

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  • Alexander Buryak
  • Ivan Guo

Abstract

Volume weighted average price (VWAP) options are a popular security type in many countries, but despite their popularity very few pricing models have been developed so far for VWAP options. This can be explained by the fact that the VWAP pricing problem is set in an incomplete market since there is no underlying with which to hedge the volume risk, and hence there is no uniquely defined price. Any price, which is obtained will include a market price of volume risk which must be determined from the corresponding volume statistics. Our analysis strongly supports the hypothesis that the empirical volume statistics of ASX equities can be described reasonably well by fitted gamma distributions. Based on this observation we suggest a simple gamma process-based model that allows for the exact analytic pricing of VWAP options in a rather straightforward way.

Suggested Citation

  • Alexander Buryak & Ivan Guo, 2014. "Effective and simple VWAP option pricing model," Papers 1407.7315, arXiv.org.
    • Handle: RePEc:arx:papers:1407.7315
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    References listed on IDEAS

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    1. Alexander Novikov & Nino Kordzakhia, 2013. "On lower and upper bounds for Asian-type options: a unified approach," Papers 1309.2383, arXiv.org.
    2. Bialkowski, Jedrzej & Darolles, Serge & Le Fol, Gaëlle, 2008. "Improving VWAP strategies: A dynamic volume approach," Journal of Banking & Finance, Elsevier, vol. 32(9), pages 1709-1722, September.
    3. Antony William Stace, 2007. "A Moment Matching Approach To The Valuation Of A Volume Weighted Average Price Option," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 10(01), pages 95-110.
    4. Konishi, Hizuru, 2002. "Optimal slice of a VWAP trade," Journal of Financial Markets, Elsevier, vol. 5(2), pages 197-221, April.
    5. Michael Curran, 1994. "Valuing Asian and Portfolio Options by Conditioning on the Geometric Mean Price," Management Science, INFORMS, vol. 40(12), pages 1705-1711, December.
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    Cited by:

    1. Victor Olkhov, 2022. "Market-Based Asset Price Probability," Papers 2205.07256, arXiv.org, revised Feb 2024.
    2. Olkhov, Victor, 2020. "Classical Option Pricing and Some Steps Further," MPRA Paper 105431, University Library of Munich, Germany, revised 28 Dec 2020.
    3. Olkhov, Victor, 2020. "Price, Volatility and the Second-Order Economic Theory," MPRA Paper 102767, University Library of Munich, Germany.
    4. Victor Olkhov, 2021. "Three Remarks On Asset Pricing," Papers 2105.13903, arXiv.org, revised Jan 2024.
    5. Alexander Novikov & Scott Alexander & Nino Kordzakhia & Timothy Ling, 2016. "Pricing of Asian-type and Basket Options via Upper and Lower Bounds," Papers 1612.08767, arXiv.org.
    6. Victor Olkhov, 2020. "Volatility Depend on Market Trades and Macro Theory," Papers 2008.07907, arXiv.org.
    7. Victor Olkhov, 2020. "Business Cycles as Collective Risk Fluctuations," Papers 2012.04506, arXiv.org.
    8. Olkhov, Victor, 2022. "Price and Payoff Autocorrelations in the Consumption-Based Asset Pricing Model," MPRA Paper 112255, University Library of Munich, Germany.
    9. Victor Olkhov, 2022. "Why Economic Theories and Policies Fail? Unnoticed Variables and Overlooked Economics," Papers 2208.07839, arXiv.org.
    10. Olkhov, Victor, 2022. "Market-Based Price Autocorrelation," MPRA Paper 120288, University Library of Munich, Germany, revised 26 Feb 2024.

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