Continuously monitored barrier options under Markov processes

2009/08/27 by Mijatovic, Aleksandar, Pistorius, Martijn · 1 citation
#Computational Finance (q-fin.CP) #FOS: Economics and business #Pricing of Securities (q-fin.PR)

paper · doi:10.48550/arxiv.0908.4028

Abstract

In this paper we present an algorithm for pricing barrier options in one-dimensional Markov models. The approach rests on the construction of an approximating continuous-time Markov chain that closely follows the dynamics of the given Markov model. We illustrate the method by implementing it for a range of models, including a local Levy process and a local volatility jump-diffusion. We also provide a convergence proof and error estimates for this algorithm.

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