Affiliation:
1. School of Business, Stevens Institute of Technology, Hoboken, NJ 07030, USA
Abstract
The short maturity limit [Formula: see text] for the implied volatility of an Asian option in the Black–Scholes model is determined by the large deviations property for the time-average of the geometric Brownian motion. In this note, we derive the subleading [Formula: see text] correction to this implied volatility, using an asymptotic expansion for the Hartman–Watson distribution. The result is used to compute subleading corrections to Asian options prices in a small maturity expansion, sharpening the leading order result obtained using large deviations theory. We demonstrate good numerical agreement with precise benchmarks for Asian options pricing in the Black–Scholes model.
Publisher
World Scientific Pub Co Pte Ltd
Subject
General Economics, Econometrics and Finance,Finance