Closed-Form Approximation of Timer Option Prices under General Stochastic Volatility Models
We develop an asymptotic expansion technique for pricing timer options under general stochastic volatility models around small volatility of variance. Closed-form approximation formulas have been obtained for the Heston model and the 3/2-model. The approximation has an easy-to-understand Black-Scholes-like form and many other attractive properties. Numerical analysis shows that the approximation formulas are very fast and accurate.
|Date of creation:||2013|
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- Heston, Steven L, 1993. "A Closed-Form Solution for Options with Stochastic Volatility with Applications to Bond and Currency Options," Review of Financial Studies, Society for Financial Studies, vol. 6(2), pages 327-43.
- Li, Minqiang & Deng, Shijie & Zhou, Jieyun, 2008.
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8259, University Library of Munich, Germany.
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- Peter Carr & Roger Lee, 2010. "Hedging variance options on continuous semimartingales," Finance and Stochastics, Springer, vol. 14(2), pages 179-207, April.
- Ling Zhi Liang & Damiaan Lemmens & Jacques Tempere, 2011. "Path integral approach to the pricing of timer options with the Duru-Kleinert time transformation," Papers 1101.3713, arXiv.org.
- Avi Bick, 1995. "Quadratic-Variation-Based Dynamic Strategies," Management Science, INFORMS, vol. 41(4), pages 722-732, April.
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