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
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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.