Effective and simple VWAP options pricing model

Alexander Buryak, Ivan Guo

Research output: Contribution to journalArticleResearchpeer-review

4 Citations (Scopus)

Abstract

Volume weighted average price (VWAP) options are a popular security type in many countries, but despite their popularity very few pricing models have been developed so far for VWAP options. This can be explained by the fact that the VWAP pricing problem is set in an incomplete market since there is no underlying with which to hedge the volume risk, and hence there is no uniquely defined price. Any price, which is obtained will include a market price of volume risk which must be determined from the corresponding volume statistics. Our analysis strongly supports the hypothesis that the empirical volume statistics of ASX equities can be described reasonably well by fitted gamma distributions. Based on this observation we suggest a simple gamma process-based model that allows for the exact analytic pricing of VWAP options in a rather straightforward way.

Original languageEnglish
Article number1450036
Number of pages13
JournalInternational Journal of Theoretical and Applied Finance
Volume17
Issue number6
DOIs
Publication statusPublished - 16 Sep 2014
Externally publishedYes

Keywords

  • analytic pricing
  • Equity option
  • volume weighting

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