An Asymptotic Expansion with Malliavin Weights: An Application to Pricing Discrete Barrier Options
This paper proposes a new approximation method for pricing barrier options with discrete monitoring under stochastic volatility environment. In particular, the integration-by-parts formula in Malliavin calculus is effectively applied in an asymptotic expansion approach. First, the paper derives an expansion formula for generalized Wiener functionals. After it is applied to pricing path-dependent derivatives with discrete monitoring, the paper presents an analytic (approximation) formula for valuation of discrete barrier options under stochastic volatility environment. To our knowledge, this paper is the first one that shows an analytical formula for pricing discrete barrier options with stochastic volatility models.
|Date of creation:||Dec 2009|
|Date of revision:|
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Web page: http://www.carf.e.u-tokyo.ac.jp/english/
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- Akihiko Takahashi & Nakahiro Yoshida, 2004. "An Asymptotic Expansion Scheme for Optimal Investment Problems," Statistical Inference for Stochastic Processes, Springer, vol. 7(2), pages 153-188, May.
- Eric Fournié & Jean-Michel Lasry & Pierre-Louis Lions & Jérôme Lebuchoux, 2001. "Applications of Malliavin calculus to Monte-Carlo methods in finance. II," Finance and Stochastics, Springer, vol. 5(2), pages 201-236.
- Gianluca Fusai & I. Abrahams & Carlo Sgarra, 2006. "An exact analytical solution for discrete barrier options," Finance and Stochastics, Springer, vol. 10(1), pages 1-26, 01.
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