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On the Performance of the Comonotonicity Approach for Pricing Asian Options in Some Benchmark Models from Equities and Commodities

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  • Jilong Chen

    (International Institute for Financial Studies and RCFMRP, Jiangxi University of Finance and Economics, Nanchang 330013, Jiangxi Province, China)

  • Christian Ewald

    (University of Glasgow, Adam Smith Business School, Department of Economics, Gilbert Scott Building, Glasgow G12 8QQ, United Kingdom)

Abstract

In this paper, we investigate the applicability of the comonotonicity approach in the context of various benchmark models for equities and commodities. Instead of classical Lévy models as in Albrecher et al. we focus on the Heston stochastic volatility model, the constant elasticity of variance (CEV) model and Schwartz’ 1997 stochastic convenience yield model. We show how the technical difficulties of inverting the distribution function of the sum of the comonotonic random vector can be overcome and that the method delivers rather tight upper bounds for the prices of Asian Options in these models, at least for strikes which are not too large. As a by-product the method delivers super-hedging strategies which can be easily implemented.

Suggested Citation

  • Jilong Chen & Christian Ewald, 2017. "On the Performance of the Comonotonicity Approach for Pricing Asian Options in Some Benchmark Models from Equities and Commodities," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 20(01), pages 1-32, March.
    • Handle: RePEc:wsi:rpbfmp:v:20:y:2017:i:01:n:s0219091517500059
    DOI: 10.1142/S0219091517500059
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    References listed on IDEAS

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