A Novel Pricing Method For European Options Based On Fourier-Cosine Series Expansions
AbstractHere we develop an option pricing method for European options based on the Fourier-cosine series, and call it the COS method. The key insight is in the close relation of the characteristic function with the series coefficients of the Fourier-cosine expansion of the density function. In most cases, the convergence rate of the COS method is exponential and the computational complexity is linear. Its range of application covers different underlying dynamics, including L\'evy processes and Heston stochastic volatility model, and various types of option contracts. We will present the method and its applications in two separate parts. The first one is this paper, where we deal with European options in particular. In a follow-up paper we will present its application to options with early-exercise features.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 7700.
Date of creation: 10 Mar 2008
Date of revision:
option pricing; European options; Fourier-cosine expansion;
Other versions of this item:
- Fang, Fang & Oosterlee, Kees, 2008. "A Novel Pricing Method For European Options Based On Fourier-Cosine Series Expansions," MPRA Paper 9319, University Library of Munich, Germany.
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
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