Tinbergen Institute Discussion Paper No. 2006-066/2
21 Pages Posted: 3 Aug 2006
Date Written: May 10, 2007
Fourier inversion is the computational method of choice for a fast and accurate calculation of plain vanilla option prices in models with an analytically available characteristic function. Shifting the contour of integration along the complex plane allows for different representations of the inverse Fourier integral. In this article, we present the optimal contour of the Fourier integral, taking into account numerical issues such as cancellation and explosion of the characteristic function. This allows for robust and fast option pricing for virtually all levels of strikes and maturities.
Keywords: Option pricing, Fourier inversion, Carr-Madan, Heston, stochastic volatility, characteristic function, damping, saddlepoint approximations
JEL Classification: C63, G13
Suggested Citation: Suggested Citation
Lord, Roger and Kahl, Christian, Optimal Fourier Inversion in Semi-Analytical Option Pricing (May 10, 2007). Tinbergen Institute Discussion Paper No. 2006-066/2. Available at SSRN: https://ssrn.com/abstract=921336 or http://dx.doi.org/10.2139/ssrn.921336