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

Li, Minqiang and Mercurio, Fabio (2013): Closed-Form Approximation of Timer Option Prices under General Stochastic Volatility Models.

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Timer Option, Closed-Form Approximation, Perturbation
• Subjects: C - Mathematical and Quantitative Methods > C0 - General > C02 - Mathematical Methods; G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates

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