Closed-Form Approximation of Timer Option Prices under General Stochastic Volatility Models

44 Pages Posted: 4 Apr 2013

Date Written: April 2, 2013

Abstract

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

Li, Minqiang and Mercurio, Fabio, Closed-Form Approximation of Timer Option Prices under General Stochastic Volatility Models (April 2, 2013). Available at SSRN: https://ssrn.com/abstract=2243629 or http://dx.doi.org/10.2139/ssrn.2243629

Minqiang Li (Contact Author)

Bloomberg LP ( email )

731 Lexington Avenue
New York, NY 10022
United States

Fabio Mercurio

Bloomberg L.P. ( email )

731 Lexington Avenue
New York, NY 10022
United States

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