Journal of Computational Finance

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Stratified approximations for the pricing of options on average

Nicolas Privault and Jiadong Yu

  • The authors propose to use stratified approximations based on the gamma and lognormal distributions for the pricing of options on average.
  • This approach improves on standard numerical approximation methods.

ABSTRACT

We propose to use stratified approximations based on the gamma and lognormal distributions for the pricing of options on average, such as Asian options and bond prices in the Dothan model. We show that this approach improves on standard numerical approximation methods and is not subject to the instabilities encountered with closed-form integral expressions.

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