Explicit solutions of the exit problem for a class of Lévy processes; applications to the pricing of double-barrier options

DOI10.1016/J.SPA.2011.09.008MaRDI QIDQ765888zbMATH OpenOpenAlexFDO

Authors Sonia Fourati

Publication date 22 March 2012

Published in Stochastic Processes and their Applications (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1003.4917

zbMATH Keywords

Bargmann equationsdouble barrier optionsexit problemsfluctuation theoryLévy processesWiener-Hopf factorization

Mathematics Subject Classification ID

Processes with independent increments; Lévy processes (60G51) Financial applications of other theories (91G80)

Abstract: Lewis and Mordecki have computed the Wiener-Hopf factorization of a L'evy process whose restriction on $]0,+infty[$ of their L'evy measure has a rational Laplace transform. That allows to compute the distribution of $(X_t,in{f}_{0leqsleqt}{X}_s)$. For the same class of L'evy processes, we compute the distribution of $(X_t,in{f}_{0leqsleqt}{X}_s,su{p}_{0leqsleqt}{X}_s)$ and also the behavior of this triple at certain stopping time, like the first exit time of an interval containing the origin. Some applications to the pricing of double barrier options with or without rebate are evocated.

Review text

Consider a Lévy process whose Lévy measure (restricted to the positive half-line) has a rational Laplace transform, i.e., is a linear combination of Gamma distributions. For this class of Lévy processes, \textit{A. L. Lewis} and \textit{E. Mordecki} [J. Appl. Probab. 45, No. 1, 118--134 (2008; Zbl 1136.60330)] have computed the Wiener-Hopf factorization, which in turn allowed them to determine the joint distribution of the process itself and its running infimum. In the present study, the author extends this analysis by computing the joint distribution of the process, its running infimum, and its running supremum, and also describing the behavior of this triplet at certain stopping times. As an application, the pricing of double barrier options with and without rebate is considered.

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Cites work

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Cited in

(9)

• Barrier options and touch-and-out options under regular Lévy processes of exponential type
• First-passage times of regime switching models
• Approximating Lévy processes with completely monotone jumps
• Lévy processes, phase-type distributions, and martingales
• Double barrier options under Lévy processes
• On the Wiener-Hopf factorization for Lévy processes with bounded positive jumps
• A note on Wiener-Hopf factorization for Markov additive processes
• A simple Wiener-Hopf factorization approach for pricing double-barrier options
• Barrier options pricing with joint distribution of Gaussian process and its maximum

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