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On the data-driven COS method

Álvaro Leitao, Cornelis W. Oosterlee, Ortiz-Gracia, Luis and Sander M. Bohte

Applied Mathematics and Computation, 2018, vol. 317, issue C, 68-84

Abstract: In this paper, we present the data-driven COS method, ddCOS. It is a Fourier-based financial option valuation method which assumes the availability of asset data samples: a characteristic function of the underlying asset probability density function is not required. As such, the presented technique represents a generalization of the well-known COS method [1]. The convergence of the proposed method is O(1/n), in line with Monte Carlo methods for pricing financial derivatives. The ddCOS method is then particularly interesting for density recovery and also for the efficient computation of the option’s sensitivities Delta and Gamma. These are often used in risk management, and can be obtained at a higher accuracy with ddCOS than with plain Monte Carlo methods.

Keywords: The COS method; Density estimation; Data-driven approach; Greeks; Delta–Gamma approach; The SABR model (search for similar items in EconPapers)
Date: 2018
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Handle: RePEc:eee:apmaco:v:317:y:2018:i:c:p:68-84