| CIRJE-F-625 | "Probability Distribution and Option Pricing for Drawdown in a Stochastic Volatility Environment" |
| Author Name | Yamamoto, Kyo, Seisho Sato and Akihiko Takahashi |
| Date | June 2009 |
| Full Paper | PDF file |
| Remarks | Revised Version of CIRJE-F-596 (2008);@electronic version of an article will be published in International Journal of Theoretical and Applied Finance c [copyright World Scientific Publishing Company][http://www.worldscinet.com/ijtaf/] ,
subsequently published in International Journal of Theoretical and Applied Finance, Volume: 13, Issue: 2 pp.335-354, March 2010. |
| Abstract |
This paper studies the probability distribution and option pricing for drawdown in a stochastic volatility environment. Their analytical approximation formulas are derived by the application of a singular perturbation method (Fouque et al. [7]). The mathematical validity of the approximation is also proven. Then, numerical examples show that the instantaneous correlation between the asset value and the volatility state crucially affects the probability distribution and option prices for drawdown. |