Continuously Monitored Barrier Options Under Markov Processes
62 Pages Posted: 27 Aug 2009 Last revised: 11 Oct 2010
There are 2 versions of this paper
Continuously Monitored Barrier Options Under Markov Processes
Continuously Monitored Barrier Options Under Markov Processes
Date Written: August 27, 2009
Abstract
In this paper we present a fast and accurate algorithm for pricing barrier options in one-dimensional Markov models, including general local volatility models with jumps, L\'evy processes and L\'evy driven SDEs. 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 L\'evy process and a local volatility jump-diffusion. Code in Matlab for one of the numerical examples is included in the paper (and is also available online). We also provide a convergence proof and error estimates for this algorithm.
Keywords: Barrier options, Markov processes
JEL Classification: G12, G13, C63
Suggested Citation: Suggested Citation
Here is the Coronavirus
related research on SSRN
Paper statistics
Recommended Papers
-
A Jump Diffusion Model for Option Pricing
By Steven Kou
-
Option Pricing Under a Double Exponential Jump Diffusion Model
By Steven Kou and Hui Wang
-
A Simple Option Formula for General Jump-Diffusion and Other Exponential Levy Processes
-
The Term Structure of Simple Forward Rates with Jump Risk
By Paul Glasserman and Steven Kou
-
A Fast and Accurate FFT-Based Method for Pricing Early-Exercise Options Under Levy Processes
By Roger Lord, Fang Fang, ...
-
From Local Volatility to Local Levy Models
By Peter Carr, Hélyette Geman, ...
-
Interest Rate Option Pricing with Poisson-Gaussian Forward Rate Curve Processes
-
By Liming Feng and Vadim Linetsky
-
By Liming Feng and Vadim Linetsky
