METHOD OF MOMENTS APPROACH TO PRICING DOUBLE BARRIER CONTRACTS IN POLYNOMIAL JUMP-DIFFUSION MODELS

Bjorn Eriksson () and Martijn Pistorius ()
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Bjorn Eriksson: Department of Mathematics, Imperial College London, South Kensington Campus, London SW7 2AZ, UK
Martijn Pistorius: Department of Mathematics, Imperial College London, South Kensington Campus, London SW7 2AZ, UK

International Journal of Theoretical and Applied Finance (IJTAF), 2011, vol. 14, issue 07, 1139-1158

Abstract: We present a method of moments approach to pricing double barrier contracts when the underlying is modelled by a polynomial jump-diffusion. By general principles the price is linked to certain infinite dimensional linear programming problems. Subsequently approximating these by finite dimensional linear programming problems, upper and lower bounds for the prices of such options are found. We derive theoretical convergence results for this algorithm, and provide numerical illustrations by applying the method to the valuation of several double barrier-type contracts (double barrier knock-out call, American corridor and double-no-touch options) under a number of different models, also allowing for a deterministic short rate.

Keywords: Double barrier option; partial barrier option; American corridor option; linear programming; moments; polynomial jump-diffusion (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (8)

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DOI: 10.1142/S0219024911006644

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