Saddlepoint approximations to option price in a general equilibrium model
AbstractIn the recent literature on option valuation, Fourier analysis has been successfully applied to determine numerically the prices of options. However, most of these numerical methods can both be slow and inaccurate. Rogers and Zane (Ann. Appl. Probab. 9 (1999) 493-503) first propose the application of the saddlepoint approximation method to compute European-type options. In this paper, we extend their approach to price a variety of European options, and in particular, when the return process of a general equilibrium model has stochastic volatility and stochastic interest rates. The model is calibrated on the S&P 500 index, and we also discuss the pros and cons of saddlepoint approximations.
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Bibliographic InfoArticle provided by Elsevier in its journal Statistics & Probability Letters.
Volume (Year): 71 (2005)
Issue (Month): 4 (March)
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