Valuing three-asset barrier options and autocallable products via exit probabilities of Brownian bridge

Hangsuck Lee, Hongjun Ha, Byungdoo Kong and Minha Lee

The North American Journal of Economics and Finance, 2024, vol. 73, issue C

Abstract: This paper discusses pricing barrier options and autocallable structured products on underlying three assets via exit probabilities of a three-dimensional Brownian bridge. We derive the marginal exit and bivariate co-exit probabilities. Despite the impossibility of finding an analytical trivariate co-exit probability, its calculation is not regarded as a purely numerical problem. After specifying the component to be numerically evaluated, logistic regression with the Monte Carlo method is adopted to predict it. Extensive numerical experiments of calculating the exit probability of the three-dimensional Brownian motion and pricing complex products demonstrate the effectiveness and efficiency of our approach.

Keywords: Exit probability; Three-dimensional Brownian bridge; Barrier options; Autocallable structured product (search for similar items in EconPapers)
JEL-codes: G13 G22 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:73:y:2024:i:c:s1062940824000998

DOI: 10.1016/j.najef.2024.102174

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