Probability Distribution and Option Pricing for Drawdown in a Stochastic Volatility Environment
This paper studies the probability distribution and option pricing for drawdown in a stochastic volatility environment. Their analytical approximation formulas are derived by the application of a singular perturbation method (Fouque et al. ). The mathematical validity of the approximation is also proven. Then, numerical examples show that the instantaneous correlation between the asset value and the volatility state crucially affects the probability distribution and option prices for drawdown.
|Date of creation:||Jun 2009|
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- Alexei Chekhlov & Stanislav Uryasev & Michael Zabarankin, 2005. "Drawdown Measure In Portfolio Optimization," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 8(01), pages 13-58.
- Sanford J. Grossman & Zhongquan Zhou, 1993. "Optimal Investment Strategies For Controlling Drawdowns," Mathematical Finance, Wiley Blackwell, vol. 3(3), pages 241-276.
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