Abstract
In this paper, we apply singular perturbation techniques to price European puts with a stochastic volatility model, and derive a simple and elegant analytical formula as an approximation for the value of European put options. In contrast to the existing Heston’s semi-analytical formula, this approximation has the following unique feature: the latter only involves the standard normal distribution function, which is as fast and easy to implement as the Black–Scholes formula; whereas the former requires the evaluation of a logarithm with a complex argument during the involved Fourier inverse transform, which may sometimes result in numerical instability. Various numerical experiments suggest that our new formula can achieve a high order of accuracy for a large class of option derivatives with relatively short tenor.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
