A NOVEL PRICING METHOD FOR EUROPEAN OPTIONS BASED ON FOURIER-COSINE SERIES EXPANSIONS

Fang Fang () and Cornelis Oosterlee

MPRA Paper from University Library of Munich, Germany

Abstract: Here we develop an option pricing method for European options based on the Fourier-cosine series, and call it the COS method. The key insight is in the close relation of the characteristic function with the series coefficients of the Fourier-cosine expansion of the density function. In most cases, the convergence rate of the COS method is exponential and the computational complexity is linear. Its range of application covers different underlying dynamics, including L\'evy processes and Heston stochastic volatility model, and various types of option contracts. We will present the method and its applications in two separate parts. The first one is this paper, where we deal with European options in particular. In a follow-up paper we will present its application to options with early-exercise features.

Keywords: option pricing; European options; Fourier-cosine expansion (search for similar items in EconPapers)
JEL-codes: G13 (search for similar items in EconPapers)
Date: 2008-03-10
New Economics Papers: this item is included in nep-ore
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Citations: View citations in EconPapers (166)

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https://mpra.ub.uni-muenchen.de/7700/1/MPRA_paper_7700.pdf original version (application/pdf)
https://mpra.ub.uni-muenchen.de/8914/4/MPRA_paper_8914.pdf revised version (application/pdf)

Related works:
Working Paper: A NOVEL PRICING METHOD FOR EUROPEAN OPTIONS BASED ON FOURIER-COSINE SERIES EXPANSIONS (2008)
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