Numerical Valuation of Asian Options with Higher Moments in the Underlying Distribution

Abstract

We have developed a modified Edgeworth binomial model with higher moment consideration for pricing European or American Asian options. If the number of the time steps increases, our numerical algorithm is as precise as that of Chalasani et al. (1999), with lognormal underlying distribution for benchmark comparison. If the underlying distribution displays negative skewness and leptokurtosis, as often observed for stock index returns, our estimates are better and very similar to the benchmarks in Hull and White (1993). The results show that our modified Edgeworth binomial model can value European and American Asian options with greater accuracy and speed given higher moments in their underlying distribution.