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Pricing American Asian options with higher moments in the underlying distribution
Authors:Keng-Hsin Lo  Kehluh Wang  Ming-Feng Hsu
Institution:1. Department and Graduate School of Business Administration, National Central University, Taiwan;2. Graduate Institute of Finance, National Chiao Tung University, Taiwan;3. Department and Graduate School of Business Management, Tatung University, Taiwan
Abstract:We develop a modified Edgeworth binomial model with higher moment consideration for pricing American Asian options. With lognormal underlying distribution for benchmark comparison, our algorithm is as precise as that of Chalasani et al. P. Chalasani, S. Jha, F. Egriboyun, A. Varikooty, A refined binomial lattice for pricing American Asian options, Rev. Derivatives Res. 3 (1) (1999) 85–105] if the number of the time steps increases. If the underlying distribution displays negative skewness and leptokurtosis as often observed for stock index returns, our estimates can work better than those in Chalasani et al. P. Chalasani, S. Jha, F. Egriboyun, A. Varikooty, A refined binomial lattice for pricing American Asian options, Rev. Derivatives Res. 3 (1) (1999) 85–105] and are very similar to the benchmarks in Hull and White J. Hull, A. White, Efficient procedures for valuing European and American path-dependent options, J. Derivatives 1 (Fall) (1993) 21–31]. The numerical analysis shows that our modified Edgeworth binomial model can value American Asian options with greater accuracy and speed given higher moments in their underlying distribution.
Keywords:American Asian options  Edgeworth binomial model  Higher moment
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