%0 Journal Article
%T Effect of Volatility Clustering on Indifference Pricing of Options by Convex Risk Measures
%A Rohini Kumar
%J Quantitative Finance
%D 2015
%I arXiv
%R 10.1080/1350486X.2014.949805
%X In this article, we look at the effect of volatility clustering on the risk indifference price of options described by Sircar and Sturm in their paper (Sircar, R., & Sturm, S. (2012). From smile asymptotics to market risk measures. Mathematical Finance. Advance online publication. doi:10.1111/mafi.12015). The indifference price in their article is obtained by using dynamic convex risk measures given by backward stochastic differential equations. Volatility clustering is modelled by a fast mean-reverting volatility in a stochastic volatility model for stock price. Asymptotics of the indifference price of options and their corresponding implied volatility are obtained in this article, as the mean-reversion time approaches zero. Correction terms to the asymptotic option price and implied volatility are also obtained.
%U http://arxiv.org/abs/1501.04548v1