Asymptotic expansion for pricing options for a mean-reverting asset with multiscale stochastic volatility |
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Authors: | Mei Choi ChiuYu Wai Lo Hoi Ying Wong |
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Affiliation: | Department of Statistics, The Chinese University of Hong Kong, Shatin, Hong Kong |
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Abstract: | This work investigates the valuation of options when the underlying asset follows a mean-reverting log-normal process with a stochastic volatility that is driven by two stochastic processes with one persistent factor and one fast mean-reverting factor. Semi-analytical pricing formulas for European options are derived by means of multiscale asymptotic techniques. Numerical examples demonstrate the use of the model and the quality of the numerical scheme. |
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Keywords: | Option pricing Mean reversion Multiscale asymptotic Stochastic volatility |
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