On the valuation of fader and discrete barrier options in Heston's Stochastic Volatility Model
We focus on closed-form option pricing in Heston's stochastic volatility model, in which closed-form formulas exist only for few option types. Most of these closed-form solutions are constructed from characteristic functions. We follow this approach and derive multivariate characteristic functions depending on at least two spot values for different points in time. The derived characteristic functions are used as building blocks to set up (semi-) analytical pricing formulas for exotic options with payoffs depending on finitely many spot values such as fader options and discretely monitored barrier options. We compare our result with different numerical methods and examine accuracy and computational times.
|Date of creation:||2008|
|Contact details of provider:|| Postal: Sonnemannstraße 9-11, 60314 Frankfurt am Main|
Phone: 069 154008-0
Web page: http://www.frankfurt-school.de/content/en/cpqf
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Darrell Duffie & Jun Pan & Kenneth Singleton, 2000.
"Transform Analysis and Asset Pricing for Affine Jump-Diffusions,"
Econometric Society, vol. 68(6), pages 1343-1376, November.
- Darrell Duffie & Jun Pan & Kenneth Singleton, 1999. "Transform Analysis and Asset Pricing for Affine Jump-Diffusions," NBER Working Papers 7105, National Bureau of Economic Research, Inc.
- Ansgar Belke & Thorsten Polleit, 2005. "(How) Do Stock Market Returns React to Monetary Policy? - An ARDL Cointegration Analysis for Germany," Diskussionspapiere aus dem Institut für Volkswirtschaftslehre der Universität Hohenheim 253/2005, Department of Economics, University of Hohenheim, Germany.
- Grunbichler, Andreas & Longstaff, Francis A., 1996. "Valuing futures and options on volatility," Journal of Banking & Finance, Elsevier, vol. 20(6), pages 985-1001, July.
- Ansgar Belke & Thorsten Polleit, 2007.
"How the ECB and the US Fed set interest rates,"
Taylor & Francis Journals, vol. 39(17), pages 2197-2209.
- Ansgar Belke & Thorsten Polleit, 2006. "How the ECB and the US Fed Set Interest Rates," Diskussionspapiere aus dem Institut für Volkswirtschaftslehre der Universität Hohenheim 269/2006, Department of Economics, University of Hohenheim, Germany.
- Susanne Kruse & Ulrich Nögel, 2005. "On the pricing of forward starting options in Heston’s model on stochastic volatility," Finance and Stochastics, Springer, vol. 9(2), pages 233-250, 04.
- Christina Bannier, 2007.
"Heterogeneous multiple bank financing: does it reduce inefficient credit-renegotiation incidences?,"
Financial Markets and Portfolio Management,
Springer;Swiss Society for Financial Market Research, vol. 21(4), pages 445-470, December.
- Bannier, Christina E., 2007. "Heterogeneous multiple bank financing: does it reduce inefficient credit-renegotation incidences?," Frankfurt School - Working Paper Series 83, Frankfurt School of Finance and Management.
- Shephard, N.G., 1991. "From Characteristic Function to Distribution Function: A Simple Framework for the Theory," Econometric Theory, Cambridge University Press, vol. 7(04), pages 519-529, December.
- Carl Chiarella & Andrew Ziogas, 2009. "American Call Options Under Jump-Diffusion Processes - A Fourier Transform Approach," Applied Mathematical Finance, Taylor & Francis Journals, vol. 16(1), pages 37-79.
- Heston, Steven L, 1993. "A Closed-Form Solution for Options with Stochastic Volatility with Applications to Bond and Currency Options," Review of Financial Studies, Society for Financial Studies, vol. 6(2), pages 327-343.
- Roger Lord & Remmert Koekkoek & Dick van Dijk, 2006.
"A Comparison of Biased Simulation Schemes for Stochastic Volatility Models,"
Tinbergen Institute Discussion Papers
06-046/4, Tinbergen Institute, revised 07 Jun 2007.
- Roger Lord & Remmert Koekkoek & Dick Van Dijk, 2010. "A comparison of biased simulation schemes for stochastic volatility models," Quantitative Finance, Taylor & Francis Journals, vol. 10(2), pages 177-194.
- Kilin, Fiodar, 2007. "Accelerating the calibration of stochastic volatility models," CPQF Working Paper Series 6, Frankfurt School of Finance and Management, Centre for Practical Quantitative Finance (CPQF).
- Wollersheim, Jutta & Barthel, Erich, 2008. "Kulturunterschiede bei Mergers & Acquisitions: Entwicklung eines Konzeptes zur Durchführung einer Cultural Due Diligence," Frankfurt School - Working Paper Series 94, Frankfurt School of Finance and Management.
- Kilin, Fiodar, 2006. "Accelerating the calibration of stochastic volatility models," MPRA Paper 2975, University Library of Munich, Germany, revised 22 Apr 2007.
When requesting a correction, please mention this item's handle: RePEc:zbw:cpqfwp:17. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (ZBW - German National Library of Economics)
If references are entirely missing, you can add them using this form.