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On the valuation of fader and discrete barrier options in Heston's Stochastic Volatility Model

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  • Griebsch, Susanne
  • Wystup, Uwe
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    Abstract

    We focus on closed-form option pricing in Heston’s stochastic volatility model, in which closed-form formulas exist only for few option types. Most of these closed-form solutions are constructed from characteristic functions. We follow this approach and derive multivariate characteristic functions depending on at least two spot values for different points in time. The derived characteristic functions are used as building blocks to set up (semi-) analytical pricing formulas for exotic options with payoffs depending on finitely many spot values such as fader options and discretely monitored barrier options. We compare our result with different numerical methods and examine accuracy and computational times. --

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    Bibliographic Info

    Paper provided by Frankfurt School of Finance and Management, Centre for Practical Quantitative Finance (CPQF) in its series CPQF Working Paper Series with number 17.

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    Date of creation: 2008
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    Handle: RePEc:zbw:cpqfwp:17

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    Keywords: exotic options; Heston Model; Characteristic Function; Multidimensional Fast Fourier Transforms;

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    1. Ansgar Belke & Thorsten Polleit, 2007. "How the ECB and the US Fed set interest rates," Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 39(17), pages 2197-2209.
    2. Ansgar Belke & Thorsten Polleit, 2005. "(How) Do Stock Market Returns React to Monetary Policy? - An ARDL Cointegration Analysis for Germany," Diskussionspapiere aus dem Institut für Volkswirtschaftslehre der Universität Hohenheim, Department of Economics, University of Hohenheim, Germany 253/2005, Department of Economics, University of Hohenheim, Germany.
    3. Bannier, Christina E., 2007. "Heterogeneous multiple bank financing: does it reduce inefficient credit-renegotation incidences?," Frankfurt School - Working Paper Series, Frankfurt School of Finance and Management 83, Frankfurt School of Finance and Management.
    4. Wollersheim, Jutta & Barthel, Erich, 2008. "Kulturunterschiede bei Mergers & Acquisitions: Entwicklung eines Konzeptes zur Durchführung einer Cultural Due Diligence," Frankfurt School - Working Paper Series, Frankfurt School of Finance and Management 94, Frankfurt School of Finance and Management.
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    Cited by:
    1. Dietmar Harhoff & Elisabeth Mueller & John Van Reenen, 2013. "What are the channels for technology sourcing? Panel data evidence from German companies," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 51524, London School of Economics and Political Science, LSE Library.
    2. Alexander Libman & Vladimir Kozlov & André Schultz, 2012. "Roving Bandits in Action: Outside Option and Governmental Predation in Autocracies," Kyklos, Wiley Blackwell, Wiley Blackwell, vol. 65(4), pages 526-562, November.
    3. Boeing, Philipp & Mueller, Elisabeth & Sandner, Philipp, 2012. "What makes Chinese firms productive? Learning from indigenous and foreign sources of knowledge," Frankfurt School - Working Paper Series, Frankfurt School of Finance and Management 196, Frankfurt School of Finance and Management.
    4. Böing, Philipp & Müller, Elisabeth, 2012. "Technological Capabilities of Chinese Enterprises: Who is Going to Compete Abroad?," Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century, Verein für Socialpolitik / German Economic Association 62081, Verein für Socialpolitik / German Economic Association.
    5. Kostka, Genia & Moslener, Ulf & Andreas, Jan G., 2011. "Barriers to energy efficiency improvement: Empirical evidence from small-and-medium sized enterprises in China," Frankfurt School - Working Paper Series, Frankfurt School of Finance and Management 178, Frankfurt School of Finance and Management.
    6. Inklaar, Robert & Koetter, Michael & Noth, Felix, 2012. "Who's afraid of big bad banks? Bank competition, SME, and industry growth," Frankfurt School - Working Paper Series, Frankfurt School of Finance and Management 197, Frankfurt School of Finance and Management.
    7. Susanne Griebsch & Kay Pilz, 2012. "A Stochastic Approach to the Valuation of Barrier Options in Heston's Stochastic Volatility Model," Research Paper Series, Quantitative Finance Research Centre, University of Technology, Sydney 309, Quantitative Finance Research Centre, University of Technology, Sydney.
    8. Susanne Griebsch, 2013. "The evaluation of European compound option prices under stochastic volatility using Fourier transform techniques," Review of Derivatives Research, Springer, Springer, vol. 16(2), pages 135-165, July.

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