Closed-Form Approximation of Timer Option Prices under General Stochastic Volatility Models
44 Pages Posted: 4 Apr 2013
Date Written: April 2, 2013
We develop an asymptotic expansion technique for pricing timer options under general stochastic volatility models around small volatility of variance. Closed-form approximation formulas have been obtained for the Heston model and the 3/2-model. The approximation has an easy-to-understand Black-Scholes-like form and many other attractive properties. Numerical analysis shows that the approximation formulas are very fast and accurate.
Keywords: Timer options, Asymptotic expansion, Closed-form approximation, Perturbation
JEL Classification: G12, G13
Suggested Citation: Suggested Citation
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By Minqiang Li