Speed and biases of Fourier-based pricing choices: a numerical analysis

DOI10.1080/00207160.2017.1322691zbMATH Open1499.30305arXiv1706.05935OpenAlexW3105957718MaRDI QIDQ5028604FDOQ5028604

Authors: Ricardo Crisóstomo 

Publication date: 10 February 2022

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

Abstract: We compare the CPU effort and pricing biases of seven Fourier-based implementations. Our analyses show that truncation and discretization errors significantly increase as we move away from the Black-Scholes-Merton framework. We rank the speed and accuracy of the competing choices, showing which methods require smaller truncation ranges and which are the most efficient in terms of sampling densities. While all implementations converge well in the Bates jump-diffusion model, Attari's formula is the only Fourier-based method that does not blow up for any Variance Gamma parameter values. In terms of speed, the use of strike vector computations significantly improves the computational burden, rendering both fast Fourier transforms (FFT) and plain delta-probability decompositions inefficient. We conclude that the multi-strike version of the COS method is notably faster than any other implementation, whereas the strike-optimized Carr Madan's formula is simultaneously faster and more accurate than the FFT, thus questioning its use.

Full work available at URL: https://arxiv.org/abs/1706.05935

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zbMATH Keywords

option pricingjump processesFourier transformspricing errorsspeed comparisons

Mathematics Subject Classification ID

Probabilistic models, generic numerical methods in probability and statistics (65C20) Computational methods for stochastic equations (aspects of stochastic analysis) (60H35) Approximation in the complex plane (30E10) Numerical methods for discrete and fast Fourier transforms (65T50)

Cites Work

• BENCHOP -- the benchmarking project in option pricing
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• The Variance Gamma Process and Option Pricing
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Cited In (4)

• ON ERRORS AND BIAS OF FOURIER TRANSFORM METHODS IN QUADRATIC TERM STRUCTURE MODELS
• Application of power series approximation techniques to valuation of European style options
• The SINC way: a fast and accurate approach to Fourier pricing
• Fast Fourier transform option pricing: efficient approximation methods under multi-factor stochastic volatility and jumps

Uses Software

• BENCHOP

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