A general approach for Parisian stopping times under Markov processes

DOI10.1007/S00780-023-00505-1zbMath1520.91408arXiv2107.06605OpenAlexW3184215451MaRDI QIDQ6111010

Gongqiu Zhang, Lingfei Li

Publication date: 6 July 2023

Published in: Finance and Stochastics (Search for Journal in Brave)

Abstract: We propose a method based on continuous time Markov chain approximation to compute the distribution of Parisian stopping times and price Parisian options under general one-dimensional Markov processes. We prove the convergence of the method under a general setting and obtain sharp estimate of the convergence rate for diffusion models. Our theoretical analysis reveals how to design the grid of the CTMC to achieve faster convergence. Numerical experiments are conducted to demonstrate the accuracy and efficiency of our method for both diffusion and jump models. To show the versality of our approach, we develop extensions for multi-sided Parisian stopping times, the joint distribution of Parisian stopping times and first passage times, Parisian bonds and for more sophisticated models like regime-switching and stochastic volatility models.

Full work available at URL: https://arxiv.org/abs/2107.06605

zbMATH Keywords

Parisian optionsMarkov chain approximationgrid designParisian stopping timeParisian ruin probability

Mathematics Subject Classification ID

Computational methods in Markov chains (60J22) Numerical methods (including Monte Carlo methods) (91G60) Derivative securities (option pricing, hedging, etc.) (91G20) Applications of continuous-time Markov processes on discrete state spaces (60J28)

Cites Work

• Unnamed Item
• Unnamed Item
• Unnamed Item
• Unnamed Item
• The joint distribution of Parisian and hitting times of Brownian motion with application to Parisian option pricing
• Pricing Parisian and Parasian options analytically
• Boundary conditions for the single-factor term structure equation
• Perturbed Brownian motion and its application to Parisian option pricing
• American Parisian options
• The Fourier-series method for inverting transforms of probability distributions
• Eigenvalue and eigenfunction asymptotics for regular Sturm-Liouville problems
• A general framework for time-changed Markov processes and applications
• A general framework for discretely sampled realized variance derivatives in stochastic volatility models with jumps
• Single-transform formulas for pricing Asian options in a general approximation framework under Markov processes
• Dependence of eigenvalues of Sturm-Liouville problems on the boundary
• Parisian ruin probability for spectrally negative Lévy processes
• Pricing American drawdown options under Markov models
• Parisian Option Pricing: A Recursive Solution for the Density of the Parisian Stopping Time
• Ruin Probability with Parisian Delay for a Spectrally Negative Lévy Risk Process
• Pricing Options in Jump-Diffusion Models: An Extrapolation Approach
• A General Framework for Pricing Asian Options Under Markov Processes
• PRICING PARISIAN-STYLE OPTIONS WITH A LATTICE METHOD
• PRICING DOUBLE BARRIER PARISIAN OPTIONS USING LAPLACE TRANSFORMS
• Elliptic Partial Differential Equations of Second Order
• Brownian Excursions and Parisian Barrier Options
• Pricing American-style Parisian up-and-out call options
• A General Valuation Framework for SABR and Stochastic Local Volatility Models
• Error analysis of finite difference and Markov chain approximations for option pricing
• Parisian options with jumps: a maturity–excursion randomization approach
• Recursive formula for the double-barrier Parisian stopping time
• On some elliptic transmission problems
• CONTINUOUSLY MONITORED BARRIER OPTIONS UNDER MARKOV PROCESSES
• The Variance Gamma Process and Option Pricing
• Analysis of Markov Chain Approximation for Option Pricing and Hedging: Grid Design and Convergence Behavior
• Computable Error Bounds of Laplace Inversion for Pricing Asian Options
• American Option Valuation under Continuous-Time Markov Chains
• Pricing of Parisian Options for a Jump-Diffusion Model with Two-Sided Jumps
• AN ANALYTICAL SOLUTION FOR PARISIAN UP-AND-IN CALLS
• Double-Barrier Parisian Options
• Azéma martingales for Bessel and CIR processes and the pricing of Parisian zero‐coupon bonds
• Analysis of Markov Chain Approximation for Diffusion Models with Nonsmooth Coefficients
• A general method for analysis and valuation of drawdown risk

Related Items (2)

A general approach for lookback option pricing under Markov models ⋮ Analysis of VIX-linked fee incentives in variable annuities via continuous-time Markov chain approximation

This page was built for publication: A general approach for Parisian stopping times under Markov processes