A Semi-group Expansion for Pricing Barrier Options

Takashi Kato, Akihiko Takahashi and Toshihiro Yamada
Additional contact information
Takashi Kato: Osaka University
Akihiko Takahashi: The University of Tokyo
Toshihiro Yamada: Mitsubishi UFJ Trust Investment Technology Institute Co., Ltd. (MTEC)

No CARF-F-349, CARF F-Series from Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo

Abstract: This paper presents a new asymptotic expansion method for pricing continuously monitoring barrier options. In particular, we develops a semi-group expansion scheme for the Cauchy-Dirichlet problem in the second-order parabolic partial differential equations (PDEs) arising in barrier option pricing. As an application, we propose a concrete approximation formula under a stochastic volatility model and demonstrate its validity by some numerical experiments.

Pages: 26 pages
Date: 2014-08
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Citations: View citations in EconPapers (6)

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