NEARLY EXACT OPTION PRICE SIMULATION USING CHARACTERISTIC FUNCTIONS

Carole Bernard (), Zhenyu Cui () and Don McLeish ()
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Carole Bernard: Department of Statistics and Actuarial Science, University of Waterloo, 200 University Av., W. Waterloo, Ontario, N2L 3G1, Canada
Zhenyu Cui: Department of Statistics and Actuarial Science, University of Waterloo, 200 University Av., W. Waterloo, Ontario, N2L 3G1, Canada
Don McLeish: Department of Statistics and Actuarial Science, University of Waterloo, 200 University Av., W. Waterloo, Ontario, N2L 3G1, Canada

International Journal of Theoretical and Applied Finance (IJTAF), 2012, vol. 15, issue 07, 1-29

Abstract: This paper presents a new approach to perform a nearly unbiased simulation using inversion of the characteristic function. As an application we are able to give unbiased estimates of the price of forward starting options in the Heston model and of continuously monitored Parisian options in the Black-Scholes framework. This method of simulation can be applied to problems for which the characteristic functions are easily evaluated but the corresponding probability density functions are complicated.

Keywords: Monte Carlo simulations; Fourier inversion; characteristic function; Parisian option; forward-start options; importance sampling; Heston stochastic volatility model (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (4)

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DOI: 10.1142/S0219024912500471

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