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An effective hybrid variance reduction method for pricing the Asian options and its variants

In this paper, we propose a variance reduction method that combines importance sampling and control variates to price European Arithmetic Asian options and its variants (i.e., Asian options plus knock-in or knock-out options) under the Black-Scholes model. The numerical results show that the propose...

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Bibliographic Details
Published in:The North American journal of economics and finance 2020-01, Vol.51, p.100961, Article 100961
Main Authors: Lu, King-Jeng, Liang, Chiung-Ju, Hsieh, Ming-Hua, Lee, Yi-Hsi
Format: Article
Language:English
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Summary:In this paper, we propose a variance reduction method that combines importance sampling and control variates to price European Arithmetic Asian options and its variants (i.e., Asian options plus knock-in or knock-out options) under the Black-Scholes model. The numerical results show that the proposed methods are especially efficient under the following scenarios: in the money, low volatility, more sampling dates, and higher barrier thresholds.
ISSN:1062-9408
1879-0860
DOI:10.1016/j.najef.2019.04.004