NDLI: Bessel Processes, the Integral of Geometric Brownian Motion, and Asian Options

Content Provider	Society for Industrial and Applied Mathematics (SIAM)
Author	Carr, P. Schrder, M.
Copyright Year	2004
Abstract	This paper is motivated by questions about averages of stochastic processeswhich originate in mathematical finance, originally in connection with valuing the so-called Asian options. Starting with [M. Yor, {\em Adv. Appl. Probab.}, 24 (1992), pp. 509--531], these questions about exponential functionals of Brownian motion have been studied in terms of Bessel processes using the Hartman--Watson theory of [M. Yor, {\em Z. Wahrsch. Verw.\ Gebiete}, 53 (1980), pp. 71--95]. Consequences of this approach for valuing Asian options proper have been spelled out in [H. Geman and M. Yor, {\em Math. Finance}, 3 (1993), pp. 349--375] whose Laplace transform results were in fact regarded as a significant advance. Unfortunately, a number of difficulties with the key results of this last paper have surfaced which are now addressed in this paper. One of them in particular is of a principal nature and originates with the Hartman--Watson approach itself: this approach is in general applicable without modifications only if it does not involve Bessel processes of negative indices. The main mathematical contribution of this paper is the development of three principal ways to overcome these restrictions, in particular by merging stochastics and complex analysis in what seems a novel way, and the discussion of their consequences for the valuation of Asian options proper.
Starting Page	400
Ending Page	425
Page Count	26
File Format	PDF
ISSN	0040585X
DOI	10.1137/S0040585X97980543
e-ISSN	10957219
Journal	Theory of Probability & Its Applications (TPRBAU)
Issue Number	3
Volume Number	48
Language	English
Publisher	Society for Industrial and Applied Mathematics
Publisher Date	2006-07-25
Access Restriction	Subscribed
Subject Keyword	Asian options Laplace transform integral of geometric Brownian motion complex analytic methods in stochastics Bessel processes
Content Type	Text
Resource Type	Article
Subject	Statistics and Probability Statistics, Probability and Uncertainty

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