A REGULARIZED FOURIER TRANSFORM APPROACH FOR VALUING OPTIONS UNDER STOCHASTIC DIVIDEND YIELDS

Baye M. Dia ()
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Baye M. Dia: Université Paris 1 Panthéon-Sorbonne, Laboratoire PRISM, Pôle Finance, 17, rue de la Sorbonne, 75231 Paris cedex 05, France

International Journal of Theoretical and Applied Finance (IJTAF), 2010, vol. 13, issue 02, 211-240

Abstract: This paper studies the option pricing problem in a class of models in which dividend yields follow a time-homogeneous diffusion. Within this framework, we develop a new approach for valuing options based on the use of a regularized Fourier transform. We derive a pricing formula for European options which gives the option price in the form of an inverse Fourier transform and propose two methods for numerically implementing this formula. As an application of this pricing approach, we introduce the Ornstein-Uhlenbeck and the square-root dividend yield models in which we explicitly solve the pricing problem for European options. Finally we highlight the main effects of a stochastic dividend yield on option prices.

Keywords: Stochastic dividend yields; Fourier transform; option pricing (search for similar items in EconPapers)
Date: 2010
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Persistent link: https://EconPapers.repec.org/RePEc:wsi:ijtafx:v:13:y:2010:i:02:n:s0219024910005747

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DOI: 10.1142/S0219024910005747

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