Continuously monitored barrier options under Markov processes

Aleksandar Mijatovic and Martijn Pistorius

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Abstract: In this paper we present an algorithm for pricing barrier options in one-dimensional Markov models. The approach rests on the construction of an approximating continuous-time Markov chain that closely follows the dynamics of the given Markov model. We illustrate the method by implementing it for a range of models, including a local Levy process and a local volatility jump-diffusion. We also provide a convergence proof and error estimates for this algorithm.

Date: 2009-08, Revised 2010-12
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:0908.4028

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