Simulation of Lévy processes and option pricing

El Hadj Aly Dia

Journal of Computational Finance

Abstract: ABSTRACT We approximate an infinite-activity Lévy process by either truncating its small jumps or replacing them by a Brownian motion with the same variance. Then we derive the errors resulting from these approximations for some exotic options (Asian, barrier, lookback and American). We also propose a simple method to evaluate these options using the approximated Lévy process.

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