Pricing methods for α-quantile and perpetual early exercise options based on Spitzer identities

C. E. Phelan, D. Marazzina and Guido Germano

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We present new numerical schemes for pricing perpetual Bermudan and American options as well as α-quantile options. This includes a new direct calculation of the optimal exercise boundary for early-exercise options. Our approach is based on the Spitzer identities for general Lévy processes and on the Wiener–Hopf method. Our direct calculation of the price of α-quantile options combines for the first time the Dassios–Port–Wendel identity and the Spitzer identities for the extrema of processes. Our results show that the new pricing methods provide excellent error convergence with respect to computational time when implemented with a range of Lévy processes.

Keywords: hindsight options; Lévy processes; perpetual American options; perpetual Bermudan options; Spitzer identities (search for similar items in EconPapers)
JEL-codes: C02 C60 D40 G12 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2020-06-02
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Published in Quantitative Finance, 2, June, 2020, 20(6), pp. 899 - 918. ISSN: 1469-7688

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Journal Article: Pricing methods for α-quantile and perpetual early exercise options based on Spitzer identities (2020)
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