Nearly exact option price simulation using characteristic functions

Carole Bernard, Zhenyu Cui, Don McLeish

Research output: Contribution to journalArticlepeer-review

8 Scopus citations

Abstract

This paper presents a new approach to perform a nearly unbiased simulation using inversion of the characteristic function. As an application we are able to give unbiased estimates of the price of forward starting options in the Heston model and of continuously monitored Parisian options in the Black-Scholes framework. This method of simulation can be applied to problems for which the characteristic functions are easily evaluated but the corresponding probability density functions are complicated.

Original languageEnglish
Article number1250047
JournalInternational Journal of Theoretical and Applied Finance
Volume15
Issue number7
DOIs
StatePublished - Nov 2012

Keywords

  • Fourier inversion
  • Heston stochastic volatility model
  • Monte Carlo simulations
  • Parisian option
  • characteristic function
  • forward-start options
  • importance sampling

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