Pricing of the geometric Asian options under a multifactor stochastic volatility model

This paper focuses on the pricing of continuous geometric Asian options (GAOs) under a new multifactor stochastic volatility model. The model considers fast and slow mean reverting factors of volatility, where slow volatility factor is approximated by a quadratic arc. The asymptotic expansion of the price function is assumed, and the first order price approximation is derived using the perturbation techniques for both floating and fixed strike GAOs. Much simplified pricing formulae for the GAOs are obtained in this multifactor stochastic volatility framework. The zeroth order term in the price approximation is the modified Black-Scholes price for the GAOs. This modified price is expressed in terms of the Black-Scholes price for the GAOs. The accuracy of the approximate option pricing formulae is established, and also verified numerically by comparing the model prices with the Monte Carlo simulation prices and the Black- Scholes prices for the GAOs. The model parameter is estimated by capturing the volatility smiles. The sensitivity analysis is also performed to investigate the effect of underlying parameters on the approximated prices. (c) 2021 Elsevier B.V. All rights reserved.