Barrier Option Pricing under the 2-Hypergeometric Stochastic Volatility Model
arXiv:1610.03230 · doi:10.1016/j.cam.2017.06.034
Abstract
We investigate the pricing of financial options under the 2-hypergeometric stochastic volatility model. This is an analytically tractable model that reproduces the volatility smile and skew effects observed in empirical market data. Using a regular perturbation method from asymptotic analysis of partial differential equations, we derive an explicit and easily computable approximate formula for the pricing of barrier options under the 2-hypergeometric stochastic volatility model. The asymptotic convergence of the method is proved under appropriate regularity conditions, and a multi-stage method for improving the quality of the approximation is discussed. Numerical examples are also provided.
arXiv comment22 pages. Accepted for publication in Journal of Computational and Applied Mathematics