 Robust barrier option pricing by frame projection under exponential Lévy dynamicsJ. Lars Kirkby Applied Mathematical Finance, 2017, vol. 24, issue 4, 337-386 Abstract: We present an efficient method for robustly pricing discretely monitored barrier and occupation time derivatives under exponential Lévy models. This includes ordinary barrier options, as well as (resetting) Parisian options, delayed barrier options (also known as cumulative Parisian or Parasian options), fader options and step options (soft-barriers), all with single and double barriers, which have yet to be priced with more general Lévy processes, including KoBoL (CGMY), Merton’s jump diffusion and NIG. The method’s efficiency is derived in part from the use of frame-projected transition densities, which transform the problem into the Fourier domain and accelerate the convergence of intermediate expectations. Moreover, these expectations are approximated by Toeplitz matrix-vector multiplications, resulting in a fast implementation. We devise an augmentation approach that contributes to the method’s robustness, adding protection against mis-specifying a proper truncation support of the transition density. Theoretical convergence is verified by a series of numerical experiments which demonstrate the method’s efficiency and accuracy. Date: 2017 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:taf:apmtfi:v:24:y:2017:i:4:p:337-386 Ordering information: This journal article can be ordered from DOI: 10.1080/1350486X.2017.1384701 Access Statistics for this article Applied Mathematical Finance is currently edited by Professor Ben Hambly and Christoph Reisinger More articles in Applied Mathematical Finance from Taylor & Francis Journals |
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