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Efficient pricing options under regime switching

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  • Oleg Kudryavtsev

    () (MATHFI - Financial mathematics - Inria Paris-Rocquencourt - Inria - Institut National de Recherche en Informatique et en Automatique - ENPC - École des Ponts ParisTech - UPEC UP12 - Université Paris-Est Créteil Val-de-Marne - Paris 12)

Abstract

In the paper, we propose two new efficient methods for pricing barrier option in wide classes of Lévy processes with/without regime switching. Both methods are based on the numerical Laplace transform inversion formulae and the Fast Wiener-Hopf factorization method developed in Kudryavtsev and Levendorski\v{i} (Finance Stoch. 13: 531--562, 2009). The first method uses the Gaver-Stehfest algorithm, the second one -- the Post-Widder formula. We prove the advantage of the new methods in terms of accuracy and convergence by using Monte-Carlo simulations.

Suggested Citation

  • Oleg Kudryavtsev, 2010. "Efficient pricing options under regime switching," Working Papers inria-00450291, HAL.
  • Handle: RePEc:hal:wpaper:inria-00450291
    Note: View the original document on HAL open archive server: https://hal.inria.fr/inria-00450291
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    Keywords

    Lévy processes; barrier options; regime switching models; Wiener-Hopf factorization; Laplace transform; numerical methods; numerical transform inversion;

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