Pricing of volume-weighted average options: Analytical approximations and numerical results

Alexander A. Novikov*, Timothy G. Ling, Nino Kordzakhia

*Corresponding author for this work

    Research output: Chapter in Book/Report/Conference proceedingChapterpeer-review

    9 Citations (Scopus)

    Abstract

    The volume weighted average price (VWAP) over rolling number of days in the averaging period is used as a benchmark price by market participants and can be regarded as an estimate for the price that a passive trader will pay to purchase securities in a market. The VWAP is commonly used in brokerage houses as a quantitative trading tool and also appears in Australian taxation law to specify the price of share-buybacks of publically-listed companies. Most of the existing literature on VWAP focuses on strategies and algorithms to acquire market securities at a price as close as possible to VWAP. In our setup the volume process is modeled via a shifted squared Ornstein-Uhlenbeck process and a geometric Brownian motion is used to model the asset price. We derive the analytical formulae for moments of VWAP and then use the moment matching approach to approximate a distribution of VWAP. Numerical results for moments of VWAP and call-option prices have been verified by Monte Carlo simulations.

    Original languageEnglish
    Title of host publicationInspired by Finance
    Subtitle of host publicationThe Musiela Festschrift
    EditorsYuri Kabanov, Marek Rutkowski, Thaleia Zariphopoulou
    Place of PublicationCham, Switzerland
    PublisherSpringer, Springer Nature
    Pages461-474
    Number of pages14
    ISBN (Electronic)9783319020693
    ISBN (Print)3319020684, 9783319020686
    DOIs
    Publication statusPublished - 2014

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