Publicação
Valuation of forward start options under affine jump-diffusion models
| Resumo: | Under the general affine jump-diffusion framework of Duffie et al. [Econometrica, 2000, 68, 1343–1376], this paper proposes an alternative pricing methodology for European-style forward start options that does not require any parallel optimization routine to ensure square integrability. Therefore, the proposed methodology is shown to possess a better accuracy–efficiency trade-off than the usual and more general approach initiated by Hong [Forward Smile and Derivative Pricing. Working paper, UBS, 2004] that is based on the knowledge of the forward characteristic function. Explicit pricing solutions are also offered under the nested jump-diffusion setting proposed by Bakshi et al. [J. Finance, 1997, 52, 2003–2049], which accommodates stochastic volatility and stochastic interest rates, and different integration schemes are numerically tested. |
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| Autores principais: | Nunes, J. P. V. |
| Outros Autores: | Alcaria, T. R. V. |
| Assunto: | Forward start options Stochastic volatility and interest rates Jump-diffusion processes Discrete Fourier transform Gaussian quadratures COS approximation |
| Ano: | 2016 |
| País: | Portugal |
| Tipo de documento: | artigo |
| Tipo de acesso: | acesso embargado |
| Instituição associada: | ISCTE |
| Idioma: | inglês |
| Origem: | Repositório ISCTE |
| Resumo: | Under the general affine jump-diffusion framework of Duffie et al. [Econometrica, 2000, 68, 1343–1376], this paper proposes an alternative pricing methodology for European-style forward start options that does not require any parallel optimization routine to ensure square integrability. Therefore, the proposed methodology is shown to possess a better accuracy–efficiency trade-off than the usual and more general approach initiated by Hong [Forward Smile and Derivative Pricing. Working paper, UBS, 2004] that is based on the knowledge of the forward characteristic function. Explicit pricing solutions are also offered under the nested jump-diffusion setting proposed by Bakshi et al. [J. Finance, 1997, 52, 2003–2049], which accommodates stochastic volatility and stochastic interest rates, and different integration schemes are numerically tested. |
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