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arXiv · 1610.03230

Barrier Option Pricing under the 2-Hypergeometric Stochastic Volatility Model

Rúben Sousa·Ana Bela Cruzeiro·Manuel Guerra
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Abstract

We investigate the pricing of financial options under the 2-hypergeometric stochastic volatility model. This is an analytically tractable model that reproduces the volatility smile and skew effects observed in empirical market data. Using a regular perturbation method from asymptotic analysis of partial differential equations, we derive an explicit and easily computable approximate formula for the pricing of barrier options under the 2-hypergeometric stochastic volatility model. The asymptotic convergence of the method is proved under appropriate regularity conditions, and a multi-stage method for improving the quality of the approximation is discussed. Numerical examples are also provided.

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Rúben Sousa, Ana Bela Cruzeiro, Manuel Guerra. 2016-10-11. Barrier Option Pricing under the 2-Hypergeometric Stochastic Volatility Model. https://doi.org/10.1016/j.cam.2017.06.034

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