IDEAS home Printed from https://ideas.repec.org/a/eee/ejores/v272y2019i3p1082-1095.html
   My bibliography  Save this article

A general framework for pricing Asian options under stochastic volatility on parallel architectures

Author

Listed:
  • Corsaro, Stefania
  • Kyriakou, Ioannis
  • Marazzina, Daniele
  • Marino, Zelda

Abstract

In this paper, we present a transform-based algorithm for pricing discretely monitored arithmetic Asian options with remarkable accuracy in a general stochastic volatility framework, including affine models and time-changed Lévy processes. The accuracy is justified both theoretically and experimentally. In addition, to speed up the valuation process, we employ high-performance computing technologies. More specifically, we develop a parallel option pricing system that can be easily reproduced on parallel computers, also realized as a cluster of personal computers. Numerical results showing the accuracy, speed and efficiency of the procedure are reported in the paper.

Suggested Citation

  • Corsaro, Stefania & Kyriakou, Ioannis & Marazzina, Daniele & Marino, Zelda, 2019. "A general framework for pricing Asian options under stochastic volatility on parallel architectures," European Journal of Operational Research, Elsevier, vol. 272(3), pages 1082-1095.
    • Handle: RePEc:eee:ejores:v:272:y:2019:i:3:p:1082-1095
    DOI: 10.1016/j.ejor.2018.07.017
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0377221718306222
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.ejor.2018.07.017?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Claudio Albanese & Ken Jackson & Petter Wiberg, 2004. "A new Fourier transform algorithm for value-at-risk," Quantitative Finance, Taylor & Francis Journals, vol. 4(3), pages 328-338.
    2. S. G. Kou, 2002. "A Jump-Diffusion Model for Option Pricing," Management Science, INFORMS, vol. 48(8), pages 1086-1101, August.
    3. Chang, Chia-Lin & McAleer, Michael, 2015. "Econometric analysis of financial derivatives: An overview," Journal of Econometrics, Elsevier, vol. 187(2), pages 403-407.
    4. Ranković, Vladimir & Ivanović, Miloš & Urošević, Branko & Jelic, Ranko, 2017. "Market risk management in a post-Basel II regulatory environmentAuthor-Name: Drenovak, Mikica," European Journal of Operational Research, Elsevier, vol. 257(3), pages 1030-1044.
    5. Ole Barndorff-Nielsen & Elisa Nicolato & Neil Shephard, 2002. "Some recent developments in stochastic volatility modelling," Quantitative Finance, Taylor & Francis Journals, vol. 2(1), pages 11-23.
    6. Ernst Eberlein & Antonis Papapantoleon & Albert Shiryaev, 2008. "On the duality principle in option pricing: semimartingale setting," Finance and Stochastics, Springer, vol. 12(2), pages 265-292, April.
    7. Fusai, Gianluca & Germano, Guido & Marazzina, Daniele, 2016. "Spitzer identity, Wiener-Hopf factorization and pricing of discretely monitored exotic options," European Journal of Operational Research, Elsevier, vol. 251(1), pages 124-134.
    8. Bakshi, Gurdip & Cao, Charles & Chen, Zhiwu, 1997. "Empirical Performance of Alternative Option Pricing Models," Journal of Finance, American Finance Association, vol. 52(5), pages 2003-2049, December.
    9. John C. Cox & Jonathan E. Ingersoll Jr. & Stephen A. Ross, 2005. "A Theory Of The Term Structure Of Interest Rates," World Scientific Book Chapters, in: Sudipto Bhattacharya & George M Constantinides (ed.), Theory Of Valuation, chapter 5, pages 129-164, World Scientific Publishing Co. Pte. Ltd..
    10. Carole Bernard & Zhenyu Cui & Don McLeish, 2017. "On The Martingale Property In Stochastic Volatility Models Based On Time-Homogeneous Diffusions," Mathematical Finance, Wiley Blackwell, vol. 27(1), pages 194-223, January.
    11. Mark Broadie & Özgür Kaya, 2006. "Exact Simulation of Stochastic Volatility and Other Affine Jump Diffusion Processes," Operations Research, INFORMS, vol. 54(2), pages 217-231, April.
    12. Darrell Duffie & Jun Pan & Kenneth Singleton, 2000. "Transform Analysis and Asset Pricing for Affine Jump-Diffusions," Econometrica, Econometric Society, vol. 68(6), pages 1343-1376, November.
    13. Carr, Peter & Wu, Liuren, 2004. "Time-changed Levy processes and option pricing," Journal of Financial Economics, Elsevier, vol. 71(1), pages 113-141, January.
    14. Heston, Steven L, 1993. "A Closed-Form Solution for Options with Stochastic Volatility with Applications to Bond and Currency Options," The Review of Financial Studies, Society for Financial Studies, vol. 6(2), pages 327-343.
    15. Micah S. Officer, 2006. "The Market Pricing of Implicit Options in Merger Collars," The Journal of Business, University of Chicago Press, vol. 79(1), pages 115-136, January.
    16. Leif Andersen & Vladimir Piterbarg, 2007. "Moment explosions in stochastic volatility models," Finance and Stochastics, Springer, vol. 11(1), pages 29-50, January.
    17. Friedrich Hubalek & Martin Keller-Ressel & Carlo Sgarra, 2017. "Geometric Asian option pricing in general affine stochastic volatility models with jumps," Quantitative Finance, Taylor & Francis Journals, vol. 17(6), pages 873-888, June.
    18. Ning Cai & Yingda Song & Steven Kou, 2015. "A General Framework for Pricing Asian Options Under Markov Processes," Operations Research, INFORMS, vol. 63(3), pages 540-554, June.
    19. Pingping Zeng & Yue Kuen Kwok, 2016. "Pricing bounds and approximations for discrete arithmetic Asian options under time-changed Lévy processes," Quantitative Finance, Taylor & Francis Journals, vol. 16(9), pages 1375-1391, September.
    20. David S. Bates, 2006. "Maximum Likelihood Estimation of Latent Affine Processes," The Review of Financial Studies, Society for Financial Studies, vol. 19(3), pages 909-965.
    21. Bates, David S, 1996. "Jumps and Stochastic Volatility: Exchange Rate Processes Implicit in Deutsche Mark Options," The Review of Financial Studies, Society for Financial Studies, vol. 9(1), pages 69-107.
    22. Fusai, Gianluca & Marena, Marina & Roncoroni, Andrea, 2008. "Analytical pricing of discretely monitored Asian-style options: Theory and application to commodity markets," Journal of Banking & Finance, Elsevier, vol. 32(10), pages 2033-2045, October.
    23. Joseph Abate & Ward Whitt, 1995. "Numerical Inversion of Laplace Transforms of Probability Distributions," INFORMS Journal on Computing, INFORMS, vol. 7(1), pages 36-43, February.
    24. Gianluca Fusai & Ioannis Kyriakou, 2016. "General Optimized Lower and Upper Bounds for Discrete and Continuous Arithmetic Asian Options," Mathematics of Operations Research, INFORMS, vol. 41(2), pages 531-559, May.
    25. Sesana, Debora & Marazzina, Daniele & Fusai, Gianluca, 2014. "Pricing exotic derivatives exploiting structure," European Journal of Operational Research, Elsevier, vol. 236(1), pages 369-381.
    26. Cui, Zhenyu & Lars Kirkby, J. & Nguyen, Duy, 2017. "A general framework for discretely sampled realized variance derivatives in stochastic volatility models with jumps," European Journal of Operational Research, Elsevier, vol. 262(1), pages 381-400.
    27. Peter Carr & Hélyette Geman & Dilip B. Madan & Marc Yor, 2003. "Stochastic Volatility for Lévy Processes," Mathematical Finance, Wiley Blackwell, vol. 13(3), pages 345-382, July.
    28. S. Corsaro & D. Marazzina & Z. Marino, 2015. "A parallel wavelet-based pricing procedure for Asian options," Quantitative Finance, Taylor & Francis Journals, vol. 15(1), pages 101-113, January.
    29. Akira Yamazaki, 2014. "Pricing average options under time-changed Lévy processes," Review of Derivatives Research, Springer, vol. 17(1), pages 79-111, April.
    30. Zhu, Yingzi & Zhou, Guofu, 2009. "Technical analysis: An asset allocation perspective on the use of moving averages," Journal of Financial Economics, Elsevier, vol. 92(3), pages 519-544, June.
    31. Cui, Zhenyu & Lee, Chihoon & Liu, Yanchu, 2018. "Single-transform formulas for pricing Asian options in a general approximation framework under Markov processes," European Journal of Operational Research, Elsevier, vol. 266(3), pages 1134-1139.
    32. Majewski, Adam A. & Bormetti, Giacomo & Corsi, Fulvio, 2015. "Smile from the past: A general option pricing framework with multiple volatility and leverage components," Journal of Econometrics, Elsevier, vol. 187(2), pages 521-531.
    33. Paul Glasserman & Kyoung-Kuk Kim, 2011. "Gamma expansion of the Heston stochastic volatility model," Finance and Stochastics, Springer, vol. 15(2), pages 267-296, June.
    34. Mercuri Lorenzo, 2011. "Pricing Asian Options In Affine Garch Models," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 14(02), pages 313-333.
    35. Ole E. Barndorff‐Nielsen & Neil Shephard, 2001. "Non‐Gaussian Ornstein–Uhlenbeck‐based models and some of their uses in financial economics," Journal of the Royal Statistical Society Series B, Royal Statistical Society, vol. 63(2), pages 167-241.
    36. Chuang-Chang Chang & Chueh-Yung Tsao, 2011. "Efficient and accurate quadratic approximation methods for pricing Asian strike options," Quantitative Finance, Taylor & Francis Journals, vol. 11(5), pages 729-748.
    37. Steve Drekic & David A. Stanford, 2001. "Reducing Delay in Preemptive Repeat Priority Queues," Operations Research, INFORMS, vol. 49(1), pages 145-156, February.
    38. Peter Carr & Helyette Geman, 2002. "The Fine Structure of Asset Returns: An Empirical Investigation," The Journal of Business, University of Chicago Press, vol. 75(2), pages 305-332, April.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Pingping Zeng & Ziqing Xu & Pingping Jiang & Yue Kuen Kwok, 2023. "Analytical solvability and exact simulation in models with affine stochastic volatility and Lévy jumps," Mathematical Finance, Wiley Blackwell, vol. 33(3), pages 842-890, July.
    2. Kaeck, Andreas & Seeger, Norman J., 2020. "VIX derivatives, hedging and vol-of-vol risk," European Journal of Operational Research, Elsevier, vol. 283(2), pages 767-782.
    3. Cui, Zhenyu & Kirkby, J. Lars & Nguyen, Duy, 2021. "A data-driven framework for consistent financial valuation and risk measurement," European Journal of Operational Research, Elsevier, vol. 289(1), pages 381-398.
    4. Alghalith, Moawia, 2019. "The distribution of the average of log-normal variables and exact Pricing of the Arithmetic Asian Options: A Simple, closed-form Formula," MPRA Paper 105588, University Library of Munich, Germany.
    5. Weinan Zhang & Pingping Zeng, 2023. "A transform-based method for pricing Asian options under general two-dimensional models," Quantitative Finance, Taylor & Francis Journals, vol. 23(11), pages 1677-1697, November.
    6. Alghalith, Moawia, 2019. "A New Price of the Arithmetic Asian Option: A Simple Formula," MPRA Paper 117047, University Library of Munich, Germany.
    7. Chih-Chen Hsu & Chung-Gee Lin & Tsung-Jung Kuo, 2020. "Pricing of Arithmetic Asian Options under Stochastic Volatility Dynamics: Overcoming the Risks of High-Frequency Trading," Mathematics, MDPI, vol. 8(12), pages 1-16, December.
    8. Kahalé, Nabil, 2020. "General multilevel Monte Carlo methods for pricing discretely monitored Asian options," European Journal of Operational Research, Elsevier, vol. 287(2), pages 739-748.
    9. Lourdes Gómez-Valle & Julia Martínez-Rodríguez, 2021. "Including Jumps in the Stochastic Valuation of Freight Derivatives," Mathematics, MDPI, vol. 9(2), pages 1-17, January.
    10. J. Lars Kirkby & Duy Nguyen, 2020. "Efficient Asian option pricing under regime switching jump diffusions and stochastic volatility models," Annals of Finance, Springer, vol. 16(3), pages 307-351, September.
    11. Xianfei Hui & Baiqing Sun & Hui Jiang & Yan Zhou, 2022. "Modeling dynamic volatility under uncertain environment with fuzziness and randomness," Papers 2204.12657, arXiv.org, revised Oct 2022.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Gianluca Fusai & Ioannis Kyriakou, 2016. "General Optimized Lower and Upper Bounds for Discrete and Continuous Arithmetic Asian Options," Mathematics of Operations Research, INFORMS, vol. 41(2), pages 531-559, May.
    2. Cui, Zhenyu & Lars Kirkby, J. & Nguyen, Duy, 2019. "A general framework for time-changed Markov processes and applications," European Journal of Operational Research, Elsevier, vol. 273(2), pages 785-800.
    3. Ioannis Kyriakou & Panos K. Pouliasis & Nikos C. Papapostolou, 2016. "Jumps and stochastic volatility in crude oil prices and advances in average option pricing," Quantitative Finance, Taylor & Francis Journals, vol. 16(12), pages 1859-1873, December.
    4. Anatoliy Swishchuk, 2013. "Modeling and Pricing of Swaps for Financial and Energy Markets with Stochastic Volatilities," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number 8660, August.
    5. Carr, Peter & Wu, Liuren, 2004. "Time-changed Levy processes and option pricing," Journal of Financial Economics, Elsevier, vol. 71(1), pages 113-141, January.
    6. Weinan Zhang & Pingping Zeng, 2023. "A transform-based method for pricing Asian options under general two-dimensional models," Quantitative Finance, Taylor & Francis Journals, vol. 23(11), pages 1677-1697, November.
    7. Yingda Song & Ning Cai & Steven Kou, 2018. "Computable Error Bounds of Laplace Inversion for Pricing Asian Options," INFORMS Journal on Computing, INFORMS, vol. 30(4), pages 634-645, January.
    8. Wu, Bin & Chen, Pengzhan & Ye, Wuyi, 2024. "Variance swaps with mean reversion and multi-factor variance," European Journal of Operational Research, Elsevier, vol. 315(1), pages 191-212.
    9. Riccardo Brignone & Carlo Sgarra, 2020. "Asian options pricing in Hawkes-type jump-diffusion models," Annals of Finance, Springer, vol. 16(1), pages 101-119, March.
    10. Yan Qu & Angelos Dassios & Hongbiao Zhao, 2023. "Shot-noise cojumps: Exact simulation and option pricing," Journal of the Operational Research Society, Taylor & Francis Journals, vol. 74(3), pages 647-665, March.
    11. Qu, Yan & Dassios, Angelos & Zhao, Hongbiao, 2023. "Shot-noise cojumps: exact simulation and option pricing," LSE Research Online Documents on Economics 111537, London School of Economics and Political Science, LSE Library.
    12. Coqueret, Guillaume & Tavin, Bertrand, 2016. "An investigation of model risk in a market with jumps and stochastic volatility," European Journal of Operational Research, Elsevier, vol. 253(3), pages 648-658.
    13. Mark Broadie & Jerome B. Detemple, 2004. "ANNIVERSARY ARTICLE: Option Pricing: Valuation Models and Applications," Management Science, INFORMS, vol. 50(9), pages 1145-1177, September.
    14. Cui, Zhenyu & Kirkby, J. Lars & Nguyen, Duy, 2021. "Efficient simulation of generalized SABR and stochastic local volatility models based on Markov chain approximations," European Journal of Operational Research, Elsevier, vol. 290(3), pages 1046-1062.
    15. Michael C. Fu & Bingqing Li & Rongwen Wu & Tianqi Zhang, 2020. "Option Pricing Under a Discrete-Time Markov Switching Stochastic Volatility with Co-Jump Model," Papers 2006.15054, arXiv.org.
    16. Gonçalo Faria & João Correia-da-Silva, 2014. "A closed-form solution for options with ambiguity about stochastic volatility," Review of Derivatives Research, Springer, vol. 17(2), pages 125-159, July.
    17. Jingzhi Huang & Liuren Wu, 2004. "Specification Analysis of Option Pricing Models Based on Time- Changed Levy Processes," Finance 0401002, University Library of Munich, Germany.
    18. Kaeck, Andreas & Rodrigues, Paulo & Seeger, Norman J., 2018. "Model Complexity and Out-of-Sample Performance: Evidence from S&P 500 Index Returns," Journal of Economic Dynamics and Control, Elsevier, vol. 90(C), pages 1-29.
    19. Kaeck, Andreas & Seeger, Norman J., 2020. "VIX derivatives, hedging and vol-of-vol risk," European Journal of Operational Research, Elsevier, vol. 283(2), pages 767-782.
    20. Winston Buckley & Sandun Perera, 2019. "Optimal demand in a mispriced asymmetric Carr–Geman–Madan–Yor (CGMY) economy," Annals of Finance, Springer, vol. 15(3), pages 337-368, September.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:ejores:v:272:y:2019:i:3:p:1082-1095. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/eor .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.