Nearly exact option price simulation using characteristic functions

Carole Bernard; Zhenyu Cui; Don McLeish

doi:10.1142/S0219024912500471

Nearly exact option price simulation using characteristic functions

Carole Bernard
, Zhenyu Cui
, Don McLeish

School of Business

University of Waterloo

Research output: Contribution to journal › Article › peer-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 language	English
Article number	1250047
Journal	International Journal of Theoretical and Applied Finance
Volume	15
Issue number	7
DOIs	https://doi.org/10.1142/S0219024912500471
State	Published - 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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10.1142/S0219024912500471

Cite this

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title = "Nearly exact option price simulation using characteristic functions",

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.",

keywords = "Fourier inversion, Heston stochastic volatility model, Monte Carlo simulations, Parisian option, characteristic function, forward-start options, importance sampling",

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AU - Bernard, Carole

AU - Cui, Zhenyu

AU - McLeish, Don

PY - 2012/11

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AB - 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.

KW - Fourier inversion

KW - Heston stochastic volatility model

KW - Monte Carlo simulations

KW - Parisian option

KW - characteristic function

KW - forward-start options

KW - importance sampling

UR - https://www.scopus.com/pages/publications/84870591059

UR - https://www.scopus.com/pages/publications/84870591059#tab=citedBy

U2 - 10.1142/S0219024912500471

DO - 10.1142/S0219024912500471

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VL - 15

JO - International Journal of Theoretical and Applied Finance

JF - International Journal of Theoretical and Applied Finance

IS - 7

M1 - 1250047

ER -

Nearly exact option price simulation using characteristic functions

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Keywords

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