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Efficiently pricing double barrier derivatives in stochastic volatility models

Author

Listed:
  • Marcos Escobar
  • Peter Hieber
  • Matthias Scherer

Abstract

Imposing a symmetry condition on returns, Carr and Lee (Math Financ 19(4):523–560, 2009 ) show that (double) barrier derivatives can be replicated by a portfolio of European options and can thus be priced using fast Fourier techniques (FFT). We show that prices of barrier derivatives in stochastic volatility models can alternatively be represented by rapidly converging series, putting forward an idea by Hieber and Scherer (Stat Probab Lett 82(1):165–172, 2012 ). This representation turns out to be faster and more accurate than FFT. Numerical examples and a toolbox of a large variety of stochastic volatility models illustrate the practical relevance of the results. Copyright Springer Science+Business Media New York 2014

Suggested Citation

  • Marcos Escobar & Peter Hieber & Matthias Scherer, 2014. "Efficiently pricing double barrier derivatives in stochastic volatility models," Review of Derivatives Research, Springer, vol. 17(2), pages 191-216, July.
    • Handle: RePEc:kap:revdev:v:17:y:2014:i:2:p:191-216
    DOI: 10.1007/s11147-013-9094-4
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    Cited by:

    1. Holger Fink & Stefan Mittnik, 2021. "Quanto Pricing beyond Black–Scholes," JRFM, MDPI, vol. 14(3), pages 1-27, March.
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    3. Peter Hieber, 2018. "Pricing exotic options in a regime switching economy: a Fourier transform method," Review of Derivatives Research, Springer, vol. 21(2), pages 231-252, July.

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    More about this item

    Keywords

    First-passage time; Barrier options; Stochastic volatility; Stochastic clock; G13; C02; C63;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques

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