Pricing of Arithmetic Asian Options under Stochastic Volatility Dynamics: Overcoming the Risks of High-Frequency Trading

Abstract

This research extended the model developed by Hull and White by integrating Taylor-series expansion into the model for deriving approximate analytical solutions for stochastic volatility forward-starting Asian options. Numerical experiments were performed to compare the proposed model with the Monte Carlo model over numerous simulations and demonstrated that the developed model has a pricing accuracy greater than 99%. Furthermore, the computation time was approximately 10−5 s for each simulation. The model’s outstanding computational performance demonstrates its capability to address the challenges of high-frequency trading.

Keywords

• Asian option
• Taylor series expansion technique
• forward starting
• high-frequency trading
• stochastic volatility