An analytical approximation formula for European option prices under a liquidity-adjusted non-affine stochastic volatility model

Shoude Huang; Xin-Jiang He; Shoude Huang; Xin-Jiang He

doi:10.3934/math.2022577

AIMS Mathematics

2022, Volume 7, Issue 6: 10364-10377. doi: 10.3934/math.2022577

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Research article

An analytical approximation formula for European option prices under a liquidity-adjusted non-affine stochastic volatility model

Shoude Huang ¹,
Xin-Jiang He ^{2
,
,}

1.
School of Mathematics and Computer Science, Anshun University, Anshun, Guizhou, China
2.
School of Economics, Zhejiang University of Technology, Hangzhou, China

Received: 13 January 2022 Revised: 08 March 2022 Accepted: 09 March 2022 Published: 25 March 2022
MSC : 91G20

In this paper, we investigate the pricing of European options under a liquidity-adjusted non-affine stochastic volatility model. An analytical European option pricing formula is successfully derived with the COS method, based on an approximation for the characteristic function of the underlying log-asset price. Numerical analysis reveals that our results are very efficient and of reasonable accuracy, and we also present some sensitivity analysis to demonstrate the effects of different parameters on option prices.
- European options,
- COS method,
- liquidity-adjusted,
- non-affine volatility
Citation: Shoude Huang, Xin-Jiang He. An analytical approximation formula for European option prices under a liquidity-adjusted non-affine stochastic volatility model[J]. AIMS Mathematics, 2022, 7(6): 10364-10377. doi: 10.3934/math.2022577

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Abstract

In this paper, we investigate the pricing of European options under a liquidity-adjusted non-affine stochastic volatility model. An analytical European option pricing formula is successfully derived with the COS method, based on an approximation for the characteristic function of the underlying log-asset price. Numerical analysis reveals that our results are very efficient and of reasonable accuracy, and we also present some sensitivity analysis to demonstrate the effects of different parameters on option prices.

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