Approximate option pricing formula for Barndorff-Nielsen and Shephard model

TL;DR

This paper develops approximate formulas for pricing options under the Barndorff-Nielsen and Shephard model, using a decomposition approach, and validates their effectiveness through numerical experiments.

Contribution

It introduces new approximation formulas for option prices in the BN-S model based on a recent decomposition method.

Findings

Approximate formulas closely match numerical benchmarks.

Numerical experiments demonstrate high accuracy of the approximations.

Method provides a practical tool for option pricing in complex models.

Abstract

For the Barndorff-Nielsen and Shephard model, we present approximate expressions of call option prices based on the decomposition formula developed by Arai (2021). Besides, some numerical experiments are also implemented to make sure how effective our approximations are.