A Semigroup Expansion for Pricing Barrier Options

Takashi Kato, Akihiko Takahashi and Toshihiro Yamada

International Journal of Stochastic Analysis, 2014, vol. 2014, 1-15

Abstract:

This paper presents a new asymptotic expansion method for pricing continuously monitoring barrier options. In particular, we develop a semigroup expansion scheme for the Cauchy-Dirichlet problem in the second-order parabolic partial differential equations (PDEs) arising in barrier option pricing. As an application, we propose a concrete approximation formula under a stochastic volatility model and demonstrate its validity by some numerical experiments.

Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:hin:jnijsa:268086

DOI: 10.1155/2014/268086

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