Laplace Transform Identities for Diffusions, with Applications to Rebates and Barrier Options
Using a simple integral identity, we derive general expressions for the Laplace transform of the transition density of the process, if killing or reflecting boundaries are specified. We also obtain a number of useful expressions for the Laplace transforms of some functions of first-passage times for the diffusion. These results are applied to the special case of squared Bessel processes with killing or reflecting boundaries. In particular, we demonstrate how the above-mentioned integral identity enables us to derive the transition density of a squared Bessel process killed at the origin, without the need to invert a Laplace transform. Finally, as an application, we consider the problem of pricing barrier options on an index described by the minimal market model.
|Date of creation:||01 Oct 2007|
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- Dmitry Davydov & Vadim Linetsky, 2001. "Pricing and Hedging Path-Dependent Options Under the CEV Process," Management Science, INFORMS, vol. 47(7), pages 949-965, July.
- Mark Craddock & David Heath & Eckhard Platen, 1999. "Numerical Inversion of Laplace Transforms: A Survey of Techniques with Applications to Derivative Pricing," Research Paper Series 27, Quantitative Finance Research Centre, University of Technology, Sydney.
- Antoon Pelsser, 2000. "Pricing double barrier options using Laplace transforms," Finance and Stochastics, Springer, vol. 4(1), pages 95-104.
- David Heath & Eckhard Platen, 2002.
"Consistent pricing and hedging for a modified constant elasticity of variance model,"
Taylor & Francis Journals, vol. 2(6), pages 459-467.
- David Heath & Eckhard Platen, 2002. "Consistent Pricing and Hedging for a Modified Constant Elasticity of Variance Model," Research Paper Series 78, Quantitative Finance Research Centre, University of Technology, Sydney.
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