Multiscale analysis of a perpetual American option with the stochastic elasticity of variance

Ji Hun Yoon; Jeong Hoon Kim; Sun Yong Choi

doi:10.1016/j.aml.2012.11.015

Multiscale analysis of a perpetual American option with the stochastic elasticity of variance

Ji Hun Yoon, Jeong Hoon Kim, Sun Yong Choi

Department of Mathematics

Research output: Contribution to journal › Article › peer-review

8 Citations (Scopus)

Abstract

A perpetual American option is considered under a generalized model of the constant elasticity of variance model where the constant elasticity is perturbed by a small fast mean-reverting Ornstein-Uhlenbeck process. By using a multiscale asymptotic analysis, we find the impact of the stochastic elasticity of variance on option prices as well as optimal exercise prices. Our results improve the existing option price structure in view of flexibility and applicability through the market price of risk. The revealed results may provide useful information on real option problems.

Original language	English
Pages (from-to)	670-675
Number of pages	6
Journal	Applied Mathematics Letters
Volume	26
Issue number	7
DOIs	https://doi.org/10.1016/j.aml.2012.11.015
Publication status	Published - 2013 Jul

Bibliographical note

Funding Information:
The research was supported by the National Research Foundation of Korea Grant NRF-2010-0008717 and NRF-2011-013-C00009 .

All Science Journal Classification (ASJC) codes

Applied Mathematics

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10.1016/j.aml.2012.11.015

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abstract = "A perpetual American option is considered under a generalized model of the constant elasticity of variance model where the constant elasticity is perturbed by a small fast mean-reverting Ornstein-Uhlenbeck process. By using a multiscale asymptotic analysis, we find the impact of the stochastic elasticity of variance on option prices as well as optimal exercise prices. Our results improve the existing option price structure in view of flexibility and applicability through the market price of risk. The revealed results may provide useful information on real option problems.",

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AU - Yoon, Ji Hun

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AU - Choi, Sun Yong

N1 - Funding Information: The research was supported by the National Research Foundation of Korea Grant NRF-2010-0008717 and NRF-2011-013-C00009 .

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N2 - A perpetual American option is considered under a generalized model of the constant elasticity of variance model where the constant elasticity is perturbed by a small fast mean-reverting Ornstein-Uhlenbeck process. By using a multiscale asymptotic analysis, we find the impact of the stochastic elasticity of variance on option prices as well as optimal exercise prices. Our results improve the existing option price structure in view of flexibility and applicability through the market price of risk. The revealed results may provide useful information on real option problems.

AB - A perpetual American option is considered under a generalized model of the constant elasticity of variance model where the constant elasticity is perturbed by a small fast mean-reverting Ornstein-Uhlenbeck process. By using a multiscale asymptotic analysis, we find the impact of the stochastic elasticity of variance on option prices as well as optimal exercise prices. Our results improve the existing option price structure in view of flexibility and applicability through the market price of risk. The revealed results may provide useful information on real option problems.

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Multiscale analysis of a perpetual American option with the stochastic elasticity of variance

Abstract

Bibliographical note

All Science Journal Classification (ASJC) codes

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