Tempered stable process, first passage time, and path-dependent option pricing

Young Shin Kim ()
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Young Shin Kim: Stony Brook University

Computational Management Science, 2019, vol. 16, issue 1, No 9, 187-215

Abstract: Abstract In this paper, we will discuss an approximation of the characteristic function of the first passage time for a Lévy process using the martingale approach. The characteristic function of the first passage time of the tempered stable process is provided explicitly or by an indirect numerical method. This will be applied to the perpetual American option pricing and the barrier option pricing. For the numerical illustration, we calibrate risk neutral process parameters using S&P 500 index option prices and apply those parameters to find prices of perpetual American option and barrier option.

Keywords: Lévy process; Tempered stable process; First passage time; Barrier option pricing; Perpetual American option pricing (search for similar items in EconPapers)
JEL-codes: C21 C42 G13 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1007/s10287-018-0326-9

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