Sinh-acceleration: efficient evaluation of probability distributions, option pricing, and Monte Carlo simulations

DOI10.1142/S0219024919500110zbMATH Open1411.91615arXiv1808.05295OpenAlexW2885264721WikidataQ128432404 ScholiaQ128432404MaRDI QIDQ5377002FDOQ5377002

Authors: Svetlana Boyarchenko, Sergei Levendorskiĭ 

Publication date: 21 May 2019

Published in: International Journal of Theoretical and Applied Finance (Search for Journal in Brave)

Abstract: Characteristic functions of several popular classes of distributions and processes admit analytic continuation into unions of strips and open coni around $mathbbRsubsetmathbbC$. The Fourier transform techniques reduces calculation of probability distributions and option prices to evaluation of integrals whose integrands are analytic in domains enjoying these properties. In the paper, we suggest to use changes of variables of the form $xi=sqrt-1omeg{a}_1+bsinh(sqrt-1omega+y)$ and the simplified trapezoid rule to evaluate the integrals accurately and fast. We formulate the general scheme, and apply the scheme for calculation probability distributions and pricing European options in L'evy models, the Heston model, the CIR model, and a L'evy model with the CIR-subordinator. We outline applications to fast and accurate calibration procedures and Monte Carlo simulations in L'evy models, regime switching L'evy models that can account for stochastic drift, volatility and skewness, and the Heston model. For calculation of quantiles in the tails using the Newton or bisection method, it suffices to precalculate several hundred of values of the characteristic exponent at points of an appropriate grid ({em conformal principal components}) and use these values in formulas for cpdf and pdf.

Full work available at URL: https://arxiv.org/abs/1808.05295

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zbMATH Keywords

Monte Carlo simulationsHeston modelCIRCGMYconformal principal components\(\sinh\)-acceleration\(\sinh\)-regular distributions\(\sinh\)-regular Lévy processesCIR subordinatorKoBoL

Mathematics Subject Classification ID

Processes with independent increments; Lévy processes (60G51) Monte Carlo methods (65C05) Derivative securities (option pricing, hedging, etc.) (91G20) Numerical methods (including Monte Carlo methods) (91G60)

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Cited In (6)

• Closed-form option pricing for exponential Lévy models: a residue approach
• Applications of artificial neural networks to simulating Lévy processes
• Efficient evaluation of double-barrier options
• Conformal accelerations method and efficient evaluation of stable distributions
• SINH-ACCELERATION FOR B-SPLINE PROJECTION WITH OPTION PRICING APPLICATIONS
• A fast Monte Carlo scheme for additive processes and option pricing

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