Multinomial method for option pricing under variance gamma

DOI10.1080/00207160.2018.1427853MaRDI QIDQ5031847zbMATH OpenOpenAlexFDO

Authors Nicola Cantarutti, João M. E. Guerra

Publication date 16 February 2022

Published in International Journal of Computer Mathematics (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1701.00112

zbMATH Keywords

American optionLévy processesmoment matchingmultinomial treevariance gamma

Mathematics Subject Classification ID

Integro-partial differential equations (45K05) Stopping times; optimal stopping problems; gambling theory (60G40) Processes with independent increments; Lévy processes (60G51) Random measures (60G57) Applications of stochastic analysis (to PDEs, etc.) (60H30) Markov chains (discrete-time Markov processes on discrete state spaces) (60J10) Computational methods in Markov chains (60J22) Derivative securities (option pricing, hedging, etc.) (91G20)

Abstract: This paper presents a multinomial method for option pricing when the underlying asset follows an exponential Variance Gamma process. The continuous time Variance Gamma process is approximated by a discrete time Markov chain with the same firsts four cumulants. This approach is particularly convenient for pricing American and Bermudan options, which can be exercised at any time up to expiration date. Numerical computations of European and American options are presented, and compared with results obtained with finite differences methods and with the Black Scholes model.

Recommendations

• On American Options Under the Variance Gamma Process
• Willow tree method for European and American option pricing under variance Gamma model
• A fast and accurate lattice model to evaluate options under the variance gamma process
• Variance-gamma and Monte Carlo
• On the numerical evaluation of option prices in the variance gamma model

Cites work

• A Finite Difference Scheme for Option Pricing in Jump Diffusion and Exponential Lévy Models
• A MULTINOMIAL APPROXIMATION FOR AMERICAN OPTION PRICES IN LÉVY PROCESS MODELS
• Asset prices are Brownian motion: Only in business time
• Fitting the variance-gamma model to financial data
• scientific article; zbMATH DE number 1728305 (Why is no real title available?)
• scientific article; zbMATH DE number 1402217 (Why is no real title available?)
• Hyperbolic distributions in finance
• Lévy Processes and Stochastic Calculus
• On American Options Under the Variance Gamma Process
• Option Pricing With V. G. Martingale Components¹
• Processes of normal inverse Gaussian type
• Properties of multinomial lattices with cumulants for option pricing and hedging
• The pricing of options and corporate liabilities
• The Variance Gamma Process and Option Pricing
• Valuing American options by simulation: a simple least-squares approach
• Valuing Bermudan options when asset returns are Lévy processes
• Variance-gamma and Monte Carlo

Cited in

(9)

• Option valuation under the VG process by a DG method.
• Multivariate subordination using generalised gamma convolutions with applications to variance gamma processes and option pricing
• Dirichlet Bridge Sampling for the Variance Gamma Process: Pricing Path-Dependent Options
• Some pricing tools for the variance gamma model
• On the numerical evaluation of option prices in the variance gamma model
• An approximate Malliavin weight for variance gamma process: sensitivity analysis of European style options
• Willow tree method for European and American option pricing under variance Gamma model
• On American Options Under the Variance Gamma Process
• Variance-gamma and Monte Carlo

This page was built for publication: Multinomial method for option pricing under variance gamma

Report a bug (only for logged in users!)Click here to report a bug for this page (MaRDI item Q5031847)