A general control variate method for time-changed LÃ©vy processes: An application to option pricing
Cong Wang and
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Kenichiro Shiraya: Graduate School of Economics, The University of Tokyo
Cong Wang: Graduate School of Economics, The University of Tokyo
Akira Yamazaki: Graduate School of Business Administration, Hosei University
No CARF-F-499, CARF F-Series from Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo
We propose a new control variate method combined with a characteristic function approach for pricing path-dependent options under time-changed LÃ©vy models. In our method, we generate a highly-correlated process with an underlying price process generated by the time-changed LÃ©vy model. We then apply the characteristic function approach with the fast Fourier transform to obtain the expected payoff of the corresponding option under the correlated process. In numerical experiments, we employ three types of path-dependent options and six types of time-changed LÃ©vy models to confirm the efficiency of our method. To the best of our knowledge, this paper is the first to develop an efficient control variate method for time-changed LÃ©vy models.
Date: 2020-12, Revised 2021-01
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Persistent link: https://EconPapers.repec.org/RePEc:cfi:fseres:cf499
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