A revisited and stable Fourier transform method for affine jump diffusion models

Marcello Minenna and Paolo Verzella

Journal of Banking & Finance, 2008, vol. 32, issue 10, 2064-2075

Abstract: In the last decade, fast Fourier transform methods (i.e. FFT) have become the standard tool for pricing and hedging with affine jump diffusion models (i.e. AJD), despite the FFT theoretical framework is still in development and it is known that the early solutions have serious problems in terms of stability and accuracy. This fact depends from the relevant computational gain that the FFT approach offers with respect to the standard Fourier transform methods that make use of a canonical inverse Levy formula. In this work we revisit a classic FT method and find that changing the quadrature algorithm and using alternative, less flawed, representation for the pricing formulas can improve the computational performance up to levels that are only three time slower than FFT can achieve. This allows to have at the same time a reasonable computational speed and the well known stability and accuracy of canonical FT methods.

Keywords: Option; pricing; Fourier; methods; Gauss; lobatto; Quadrature; schemes; Calibration; performances (search for similar items in EconPapers)
Date: 2008
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:32:y:2008:i:10:p:2064-2075

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