Abstract
It is shown that Marc Yor’s formula (Adv. Appl. Probab. 24:509–531, 1992) for the density of the integral of exponential Brownian motion taken over a finite time interval is an extremal member of a family of previously unknown integral formulae for the same density. The derivation is independent from the one by Yor and obtained from a simple time-reversibility feature, in conjunction with a Fokker–Planck type argument. Similar arguments lead to an independent derivation of Dufresne’s result (Scand. Actuar. J. 90:39–79, 1990) for the law of the integral taken over an infinite time interval. The numerical aspects of the new formulae are developed, with concrete applications to Asian options.
Similar content being viewed by others
Notes
The most common use of (1.3) has been to identify the integral component(s) on the right side as diffusion(s) (in \(t\)) and rely on diffusion theory for the study of the distribution of the associated component(s) on the left side. In contrast, the time dynamics play no role in the present study, except for the fact that an infinitesimal generator for either side exists.
In Dufresne [11, Proposition 4.4.4], this property is established as a consequence from the \(\mathrm{arcsine}\) law. Alternatively, it can be seen as a direct application of the law of the iterated logarithm, since \(\int_{0}^{\infty }e^{\sigma ((1+\varepsilon ) \sqrt{2s\log (\log s)}+\nu s)}\,\mathrm{d}s<\infty \) for every choice of \(\sigma ,\varepsilon >0\) and \(\nu <0\).
Strictly speaking, although identical in terms of dynamics, the SDE that one can write for the process \(Z\) from (3.1) is different for the SDE that one can write for the integral taken over finite time (see [3, 19, 20, 21, 22, 25]) in the sense that the filtration of \(Z\) is larger, and this is what allows us to “fit” the limiting distribution into the initial state \(Z_{0}\), which then makes passing to the limit redundant. In fact, the coincidence between the two SDEs is an accident of a sort, because the process \(Z\) originates from perturbing in a particular way the integral over infinite time, and the result \(Z\) cannot depend on the history of the Brownian motion until time \(t\) alone.
See http://dlmf.nist.gov/10.32.E9 regarding the identity involving \(K_{1}\).
Yor’s formula (1.1) is essentially a consequence from the contour integral representation of the density of the Hartman–Watson law.
Equation (5.3) is the only condition that we want the function \(g_{t,p}(\,\cdot \,)\) to satisfy. Because of the magic of the Cauchy formula and the calculus of residues, the left side of (5.3) is nothing but a differentiation operation of order \(p-2\) applied to \(g_{t,p}(\,\cdot \,)\), while the right side is given. It should be clear that (5.3) can be satisfied with infinitely many choices for \(g_{t,p}(\,\cdot \,)\).
Apparently, there are infinitely many choices for the contour \(\zeta \) that can be used for constructing integral representations that are of interest to us. The study of which choices would lead to the most computationally efficient representations is beyond the scope of the present paper. Our choices here appear to be “natural”, but we are also trying to mimic the contour integral representations from [32] simply because we insist on developing integral representation of which (1.1) is a special case.
Generally, the GSL C-library is much faster, but in all experiments described here, both methods return the results practically in an instant.
With \(p=3\) and \(f(x)=x\) or \(f(x)=(x-K)^{+}\), the integration with respect to \(x\) can be closed, but the integration with respect to the remaining variables \(u\) and \(y\) can only be carried out as an iterated double integral (in this order).
The first function uses the GSL C-library, while the second one uses the QUADPACK package.
One possible explanation for this phenomenon is that the closed-form expression for \({\mathfrak{R}}(F _{t,\sigma ,\mu ,k}(u,w))\) is quite long and requires a substantially larger number of evaluations.
References
Alili, L., Dufresne, D., Yor, M.: Sur l’identité de Bougerol pour les fonctionnelles exponentielles du mouvement brownien avec drift. In: Yor, M. (ed.) Exponential Functionals and Principal Values Related to Brownian Motion. A Collection of Research Papers, pp. 3–14. Biblioteca de la Revista Matemática Ibero-Americana, Madrid (1997)
Baudoin, F., O’Connell, N.: Exponential functionals of Brownian motion and class-one Whittaker functions. Ann. Inst. Henri Poincaré B, Calc. Probab. Stat. 47, 1096–1120 (2011)
Bertoin, J., Yor, M.: Exponential functionals of Lévy processes. Probab. Surv. 2, 191–212 (2005)
Carmona, P., Petit, F., Yor, M.: On the distribution and asymptotic results for exponential functionals of Lévy processes. In: Yor, M. (ed.) Exponential Functionals and Principal Values Related to Brownian Motion. A Collection of Research Papers, pp. 73–130. Biblioteca de la Revista Matemática IberoAmericana, Madrid (1997)
Chamayou, J., Letac, G.: Explicit stationary distributions for compositions of random functions and products of random matrices. J. Theor. Probab. 4, 3–36 (1991)
Chaumont, L., Hobson, D.G., Yor, M.: Some consequences of the cyclic exchangeability property for exponential functionals of Lévy processes. In: Azéma, J., et al. (eds.) Séminaire de Probabilités de Strasbourg 35. Lecture Notes in Mathematics, vol. 1755, pp. 334–347 (2001)
Comtet, A., Monthus, C., Yor, M.: Exponential functionals of Brownian motion and disordered systems. J. Appl. Probab. 35, 255–271 (1998)
Donati-Martin, C., Matsumoto, H., Yor, M.: On striking identities about the exponential functionals of the Brownian bridge and Brownian motion. Period. Math. Hung. 41, 103–119 (2000)
Donati-Martin, C., Matsumoto, H., Yor, M.: On positive and negative moments of the integral of geometric Brownian motions. Stat. Probab. Lett. 49, 45–52 (2000)
Dufresne, D.: Weak convergence of random growth processes with applications to insurance. Insur. Math. Econ. 8, 187–201 (1989)
Dufresne, D.: The distribution of a perpetuity with application to risk theory and pension funding. Scand. Actuar. J. 90, 39–79 (1990)
Dufresne, D.: Laguerre series for Asian and other options. Math. Finance 10, 407–428 (2000)
Dufresne, D.: The integral of geometric Brownian motion. Adv. Appl. Probab. 33, 223–241 (2001)
Eydeland, A., Geman, H.: Domino effect: Inverting the Laplace transform. Risk 8, 65–67 (1995)
Geman, H., Yor, M.: Bessel process, Asian options and perpetuities. Math. Finance 3, 349–375 (1993)
Getoor, R.K.: The Brownian escape process. Ann. Probab. 7, 864–867 (1979)
Hobson, D.G.: A short proof of an identity for a Brownian bridge due to Donati-Martin, Matsumoto and Yor. Stat. Probab. Lett. 77, 148–150 (2007)
Kordzakhia, N., Novikov, A.: On lower and upper bounds for Asian-type options: A unified approach (2013). Preprint, available online at: arXiv:1309.2383
Linetsky, V.: Spectral expansions for Asian (average price) options. Oper. Res. 52, 856–867 (2004)
Matsumoto, H., Yor, M.: An analogue of Pitman’s \(2M-X\) theorem for exponential Wiener functionals, Part I: A time-inversion approach. Nagoya Math. J. 159, 125–166 (2000)
Matsumoto, H., Yor, M.: An analogue of Pitman’s \(2M - X\) theorem for exponential Wiener functionals, Part II: The role of the generalized inverse Gaussian laws. Nagoya Math. J. 162, 65–86 (2001)
Matsumoto, H., Yor, M.: Exponential functionals of Brownian motion, I: Probability laws at fixed time. Probab. Surv. 2, 312–347 (2005)
Matsumoto, H., Yor, M.: Exponential functionals of Brownian motion, II: Some related diffusion processes. Probab. Surv. 2, 348–384 (2005)
Milevsky, M.A., Posner, S.E.: Asian options, the sum of lognormals, and the reciprocal gamma distribution. J. Financ. Quant. Anal. 33, 409–422 (1998)
Pollak, M., Siegmund, D.: A diffusion process and its applications to detecting a change in the drift of a Brownian motion. Biometrika 72, 267–280 (1985)
Rogers, L.C.G., Shi, Z.: The value of an Asian option. J. Appl. Probab. 32, 1077–1088 (1995)
Thompson, G.W.P.: Fast narrow bounds on the value of Asian options. Working paper (1999). Available online at: http://www.jbs.cam.ac.uk/fileadmin/user_upload/research/workingpapers/wp0209.pdf
Turnbull, S.M., Wakeman, L.M.: A quick algorithm for pricing European average options. J. Financ. Quant. Anal. 26, 377–389 (1991)
Večeř, J.: A new PDE approach for pricing arithmetic average Asian options. J. Comput. Finance 4, 105–113 (2001)
Večeř, J.: Black–Scholes representation for Asian options. Math. Finance 24, 598–626 (2014)
Vervaat, W.: On a stochastic difference equation and a representation of non-negative infinitely divisible random variables. Adv. Appl. Probab. 11, 750–783 (1979)
Yor, M.: Loi de l’indice du lacet brownien, et distribution de Hartman–Watson. Z. Wahrscheinlichkeitstheor. Verw. Geb. 53, 71–95 (1980)
Yor, M.: On some exponential functionals of Brownian motion. Adv. Appl. Probab. 24, 509–531 (1992)
Yor, M.: Sur certain fonctionnelles exponentielles du mouvement brownien réel. J. Appl. Probab. 29, 202–208 (1992)
Yor, M.: Exponential Functionals of Brownian Motion and Related Processes. Springer, Berlin (2001)
Acknowledgements
The author is greatly indebted to two exceptionally conscientious and constructive anonymous referees, and also to Catherine Donati-Martin, Helyette Geman, Yannis Karatzas, Alex Novikov, Hiroyuki Matsumoto, and especially to Marc Yor, for their interest in the present work and for many helpful comments.
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Lyasoff, A. Another look at the integral of exponential Brownian motion and the pricing of Asian options. Finance Stoch 20, 1061–1096 (2016). https://doi.org/10.1007/s00780-016-0307-1
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s00780-016-0307-1