Hilbert transform, spectral filters and option pricing

DOI10.1007/S10479-018-2881-4zbMATH Open1459.91221arXiv1706.09755OpenAlexW2731848344WikidataQ129892297 ScholiaQ129892297MaRDI QIDQ2288941FDOQ2288941

Authors: Carolyn E. Phelan, Daniele Marazzina, Gianluca Fusai, Guido Germano 

Publication date: 20 January 2020

Published in: Annals of Operations Research (Search for Journal in Brave)

Abstract: We show how spectral filters can improve the convergence of numerical schemes which use discrete Hilbert transforms based on a sinc function expansion, and thus ultimately on the fast Fourier transform. This is relevant, for example, for the computation of fluctuation identities, which give the distribution of the maximum or the minimum of a random path, or the joint distribution at maturity with the extrema staying below or above barriers. We use as examples the methods by Feng and Linetsky (2008) and Fusai, Germano and Marazzina (2016) to price discretely monitored barrier options where the underlying asset price is modelled by an exponential L'evy process. Both methods show exponential convergence with respect to the number of grid points in most cases, but are limited to polynomial convergence under certain conditions. We relate these rates of convergence to the Gibbs phenomenon for Fourier transforms and achieve improved results with spectral filtering.

Full work available at URL: https://arxiv.org/abs/1706.09755

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zbMATH Keywords

Fourier transformFFTHilbert transformWiener-Hopf factorisationdiscrete monitoringGibbs phenomenonsinc function\(z\)-transformSpitzer identitydouble-barrier optionspectral filterLévy processes

Mathematics Subject Classification ID

Processes with independent increments; Lévy processes (60G51) Derivative securities (option pricing, hedging, etc.) (91G20) Numerical methods (including Monte Carlo methods) (91G60) Probabilistic models, generic numerical methods in probability and statistics (65C20)

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Cited In (7)

• Pricing methods for \(\alpha \)-quantile and perpetual early exercise options based on Spitzer identities
• Pricing discretely-monitored double barrier options with small probabilities of execution
• A multidimensional Hilbert transform approach for barrier option pricing and survival probability calculation
• The bilateral Gamma motion: calibration and option pricing
• A simple Wiener-Hopf factorization approach for pricing double-barrier options
• A fast Monte Carlo scheme for additive processes and option pricing
• Green transition, investment horizon, and dynamic portfolio decisions

Uses Software

• FFTW
• Sinc-Pack
• PricingMixedTS

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