An imprecise pricing model for Asian options based on Nonparametric predictive inference

Abstract

This paper concerns the price procedure for Asian options under circumstances where limited information is available in the market. We present a novel approach to price the Asian option from the aspect of imprecise probability. Nonparametric Predictive Inference (NPI) is applied to infer the average value of the future underlying asset price, offering the prediction with few assumptions while reflecting more uncertainty with the presentation of the interval. A rational pairwise trading criterion is also proposed in this paper for the Asian options comparison as a risk measure. The NPI method for the Asian option is illustrated in several examples using simulation techniques or empirical data from the oil market. Overall, our findings reveal that the imprecise pricing method for Asian options based on NPI is an excellent approach to managing the problem of insufficient market information.