CIRJE-F-597 | "A Remark on a Singular Perturbation Method for Option Pricing under a Stochastic Volatility Model" |
Author Name | Yamamoto, Kyo and Akihiko Takahashi |
Date | October 2008 |
Full Paper | @@ |
Remarks | Subsequently published in Asia-Pacific Financial Markets 16,333–345, 2009. |
Abstract |
This paper studies the accuracy of a singular perturbation method for option pricing under a stochastic volatility model ([8]). First, through numerical experiments we confirm that the first order approximation provides sufficiently accurate option prices in a fast mean-reversion case of the volatility process while it does not in a non-fast mean-reversion case. Then, we derive the second order approximation formula and examine the improvement of the approximation. |