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Pricing perpetual American puts under multi-scale stochastic volatility,

Journal Article


Abstract


  • In this paper, we consider the problem of pricing perpetual American put options with volatility driven by two other processes. By using a perturbation approach, we obtain approximate but explicit closed-form pricing formulae for the option and optimal exercise prices, respectively, under a general multi-scale SV (stochastic volatility) model. A key feature of the expansion methodology employed here is to balance the two SV processes, while dealing with the free boundary conditions properly. It turns out that in the current formulae, the fast volatility factor does not play an explicit role, while the slow factor is quite crucial, a phenomenon that is shown to be quite reasonable through our discussions

Publication Date


  • 2012

Citation


  • Chen, W. & Zhu, S. (2012). Pricing perpetual American puts under multi-scale stochastic volatility,. Asymptotic Analysis, 80 (1-2), 133-148.

Scopus Eid


  • 2-s2.0-84870830046

Ro Metadata Url


  • http://ro.uow.edu.au/eispapers/160

Has Global Citation Frequency


Number Of Pages


  • 15

Start Page


  • 133

End Page


  • 148

Volume


  • 80

Issue


  • 1-2

Place Of Publication


  • The Netherlands

Abstract


  • In this paper, we consider the problem of pricing perpetual American put options with volatility driven by two other processes. By using a perturbation approach, we obtain approximate but explicit closed-form pricing formulae for the option and optimal exercise prices, respectively, under a general multi-scale SV (stochastic volatility) model. A key feature of the expansion methodology employed here is to balance the two SV processes, while dealing with the free boundary conditions properly. It turns out that in the current formulae, the fast volatility factor does not play an explicit role, while the slow factor is quite crucial, a phenomenon that is shown to be quite reasonable through our discussions

Publication Date


  • 2012

Citation


  • Chen, W. & Zhu, S. (2012). Pricing perpetual American puts under multi-scale stochastic volatility,. Asymptotic Analysis, 80 (1-2), 133-148.

Scopus Eid


  • 2-s2.0-84870830046

Ro Metadata Url


  • http://ro.uow.edu.au/eispapers/160

Has Global Citation Frequency


Number Of Pages


  • 15

Start Page


  • 133

End Page


  • 148

Volume


  • 80

Issue


  • 1-2

Place Of Publication


  • The Netherlands