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Continuity Theorems in Boundary Crossing Problems for Diffusion Processes

In: Contemporary Quantitative Finance

Author

Listed:
  • Konstantin A. Borovkov

    (Univ. of Melbourne, Dept. of Mathematics and Statistics)

  • Andrew N. Downes

    (Univ. of Melbourne, Dept. of Mathematics and Statistics)

  • Alexander A. Novikov

    (The University of Technology, Dept. of Mathematical Sciences)

Abstract

Computing the probability for a given diffusion process to stay under a particular boundary is crucial in many important applications including pricing financial barrier options and defaultable bonds. It is a rather tedious task that, in the general case, requires the use of some approximation methodology. One possible approach to this problem is to approximate given (general curvilinear) boundaries with some other boundaries of a form enabling one to relatively easily compute the boundary crossing probability. We discuss results on the accuracy of such approximations for both the Brownian motion process and general time-homogeneous diffusions and also some contiguous topics.

Suggested Citation

  • Konstantin A. Borovkov & Andrew N. Downes & Alexander A. Novikov, 2010. "Continuity Theorems in Boundary Crossing Problems for Diffusion Processes," Springer Books, in: Carl Chiarella & Alexander Novikov (ed.), Contemporary Quantitative Finance, pages 335-351, Springer.
    • Handle: RePEc:spr:sprchp:978-3-642-03479-4_17
    DOI: 10.1007/978-3-642-03479-4_17
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