Singular Fourier-Padé series expansion of European option prices
From MaRDI portal
Publication:4554487
DOI10.1080/14697688.2017.1414952zbMATH Open1400.91583arXiv1706.06709OpenAlexW2639875259MaRDI QIDQ4554487FDOQ4554487
Authors: Tat Lung Chan (Ron) 
Publication date: 14 November 2018
Published in: Quantitative Finance (Search for Journal in Brave)
Abstract: We apply a new numerical method, the singular Fourier-Pad'e (SFP) method invented by Driscoll and Fornberg (2001, 2011), to price European-type options in L'evy and affine processes. The motivation behind this application is to reduce the inefficiency of current Fourier techniques when they are used to approximate piecewise continuous (non-smooth) probability density functions. When techniques such as fast Fourier transforms and Fourier series are applied to price and hedge options with non-smooth probability density functions, they cause the Gibbs phenomenon, accordingly, the techniques converge slowly for density functions with jumps in value or derivatives. This seriously adversely affects the efficiency and accuracy of these techniques. In this paper, we derive pricing formulae and their option Greeks using the SFP method to resolve the Gibbs phenomenon and restore the global spectral convergence rate. Moreover, we show that our method requires a small number of terms to yield fast error convergence, and it is able to accurately price any European-type option deep in/out of the money and with very long/short maturities. Furthermore, we conduct an error-bound analysis of the SFP method in option pricing. This new method performs favourably in numerical experiments compared with existing techniques.
Full work available at URL: https://arxiv.org/abs/1706.06709
Recommendations
- An SFP-FCC method for pricing and hedging early-exercise options under Lévy processes
- Efficient option pricing methods based on Fourier series expansions
- A novel pricing method for European options based on Fourier-cosine series expansions
- The SINC way: a fast and accurate approach to Fourier pricing
- Efficient Option Pricing by Frame Duality with the Fast Fourier Transform
Processes with independent increments; Lévy processes (60G51) Derivative securities (option pricing, hedging, etc.) (91G20)
Cites Work
- BENCHOP -- the benchmarking project in option pricing
- The pricing of options and corporate liabilities
- Financial Modelling with Jump Processes
- A novel pricing method for European options based on Fourier-cosine series expansions
- Affine processes and applications in finance
- Title not available (Why is that?)
- The Variance Gamma Process and Option Pricing
- A Fourier-based valuation method for Bermudan and barrier options under Heston's model
- Pricing early-exercise and discrete barrier options by Fourier-cosine series expansions
- Complex logarithms in Heston-like models
- Option Pricing With V. G. Martingale Components1
- Robust Padé Approximation via SVD
- Robust pricing of European options with wavelets and the characteristic function
- On the Gibbs Phenomenon and Its Resolution
- A Padé-based algorithm for overcoming the Gibbs phenomenon
- Efficient pricing of European-style Asian options under exponential Lévy processes based on Fourier cosine expansions
- A Fast and Accurate FFT-Based Method for Pricing Early-Exercise Options under Lévy Processes
- Accurate Evaluation of European and American Options Under the CGMY Process
- Rational trigonometric approximations using Fourier series partial sums
- On a high order numerical method for solving partial differential equations in complex geometries
- Continuous and Discrete Nonlinear Approximations Based on Fourier Series
- Title not available (Why is that?)
- A highly efficient Shannon wavelet inverse Fourier technique for pricing European options
- Fast computation of vanilla prices in time-changed models and implied volatilities using rational approximations
Cited In (6)
- Pricing European-type, early-exercise and discrete barrier options using an algorithm for the convolution of Legendre series
- An SFP-FCC method for pricing and hedging early-exercise options under Lévy processes
- Hermite polynomial based expansion of European option prices
- Fourier Cosine Expansions and Put–Call Relations for Bermudan Options
- Uniform asymptotic expansions for pricing European options
- The SINC way: a fast and accurate approach to Fourier pricing
Uses Software
This page was built for publication: Singular Fourier-Padé series expansion of European option prices
Report a bug (only for logged in users!)Click here to report a bug for this page (MaRDI item Q4554487)
