A Novel Pricing Method for European Options Based on Fourier-Cosine Series Expansions
SIAM Journal on Scientific Computing
Pricing early-exercise and discrete barrier options by fourier-cosine series expansions
Numerische Mathematik
| Hi-index | 7.29 |
We propose to approximate the Meixner model by a member of the @b-family introduced by Kuznetsov (2010) in [2]. The advantage of the approximation is the semi-explicit formulae for the running extrema under the @b-family processes which enables us to produce more efficient algorithms for pricing path dependent options through the Wiener-Hopf factors. We will explore the performance of the approximation both in an equity framework and in the credit risk setting, where we use the approximation to calibrate a surface of credit default swaps. The paper follows the approach of the study made by Schoutens and Damme (2010) in [1], where the aim was to approximate the variance gamma. We will contextualize the results by Schoutens and Damme (2010) in [1] and the ones here with respect to the approach taken by Jeannin and Pistorius (2010) in [15]. An asymptotic expression for the rate of convergence of the approximation is derived.