Analytical valuation for geometric Asian options in illiquid markets

Li, Zhe; Zhang, Weiguo; Liu, Yong Jun

doi:10.1016/j.physa.2018.05.069

Cited by 17 publications

(1 citation statement)

References 49 publications

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“…As a result, it is further extended by Brunetti and Caldarera (2004), who discounted stock prices using a market-liquidity-related parameter to take liquidity risks into account. This parameter is made stochastic by Feng et al (2014), whose model has attracted a number of authors for pricing financial derivatives (Li et al, 2018(Li et al, , 2019Pasricha & Goel, 2022).…”

Section: Introductionmentioning

confidence: 99%

Analytically pricing exchange options with stochastic liquidity and regime switching

Lin

2023

Journal of Futures Markets

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We investigate the valuation of exchange options when the market is affected by changing economic conditions as well as liquidity risks. The volatility and expected returns of both stocks are assumed to be controlled by a continuous‐time Markov chain to reflect the effects of varying economic conditions, and a liquidity discounting factor is employed to capture the impact of market liquidity on stock prices. Once the model has been established, we construct a risk‐neutral measure with the use of regime‐switching Esscher transform, and the characteristic function is then derived in an analytical form, so that a closed‐form formula for exchange options can be presented. We further analyze the effects of the two considered factors on exchange option prices numerically.

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