Pricing Early-Exercise and Discrete Barrier Options by Shannon Wavelet Expansions
33 Pages Posted: 20 Dec 2015 Last revised: 16 Aug 2016
Date Written: August 15, 2016
We present a pricing method based on Shannon wavelet expansions for early-exercise and discretely-monitored barrier options under exponential Lévy asset dynamics. Shannon wavelets are smooth, and thus approximate the densities that occur in finance well, resulting in exponential convergence. Application of the Fast Fourier Transform yields an efficient implementation and since wavelet are local approximations, the domain boundary errors can be naturally resolved, which is the main improvement over existing methods.
Keywords: Shannon wavelets; Bermudan options; barrier options
JEL Classification: C63
Suggested Citation: Suggested Citation