Parisian option pricing: a recursive solution for the density of the Parisian stopping time

Angelos Dassios and Jia Wei Lim

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: In this paper, we obtain the density function of the single barrier one-sided Parisian stopping time. The problem reduces to that of solving a Volterra integral equation of the first kind, where a recursive solution is consequently obtained. The advantage of this new method as compared to that in previous literature is that the recursions are easy to program as the resulting formula involves only a finite sum and does not require a numerical inversion of the Laplace transform. For long window periods, an explicit formula for the density of the stopping time can be obtained. For shorter window lengths, we derive a recursive equation from which numerical results are computed. From these results, we compute the prices of one-sided Parisian options.

Keywords: Parisian option; Brownian excursion; Volterra equation (search for similar items in EconPapers)
JEL-codes: C1 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (6)

Published in SIAM Journal on Financial Mathematics, 2013, 4(1), pp. 599-615. ISSN: 1945-497X

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