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., 2000). The mathematical validity of the approximation is al...

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Published in:International journal of theoretical and applied finance 2010-03, Vol.13 (2), p.335-354
Main Authors: YAMAMOTO, KYO, SATO, SEISHO, TAKAHASHI, AKIHIKO
Format: Article
Language:English
Subjects:
Applied economics
Approximation
Capital market
Correlation analysis
Econometric models
Europe
Financial analysis
Option pricing
Probability distribution
Securities prices
Stochastic models
Stochastic processes
Studies
Volatility
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description 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., 2000). 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.
doi_str_mv 10.1142/S0219024910005796
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subjects Applied economics
Approximation
Capital market
Correlation analysis
Econometric models
Europe
Financial analysis
Option pricing
Probability distribution
Securities prices
Stochastic models
Stochastic processes
Studies
Volatility
title PROBABILITY DISTRIBUTION AND OPTION PRICING FOR DRAWDOWN IN A STOCHASTIC VOLATILITY ENVIRONMENT
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