Probability Distribution and Option Pricing for Drawdown in a Stochastic Volatility Environmen

Yamamoto Kyo
Seisho Sato
Akihiko Takahashi

Publication date

June 2009

Publisher

Center for International Research on the Japanese Economy

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.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/]本文フィルはリンク先を参照のこ