Efficient Pricing of Barrier Options on High Volatility Assets using\n Subset Simulation

2018/03/08 by Keegan Mendonca, Vasileios E. Kontosakos, Mendonca, Keegan +5
Economics, Econometrics and Finance · Social Sciences · #Stochastic processes and financial applications #Insurance, Mortality, Demography, Risk Management #Financial Markets and Investment Strategies

paper · pdf · doi:10.48550/arxiv.1803.03364

Abstract

Barrier options are one of the most widely traded exotic options on stock\nexchanges. In this paper, we develop a new stochastic simulation method for\npricing barrier options and estimating the corresponding execution\nprobabilities. We show that the proposed method always outperforms the standard\nMonte Carlo approach and becomes substantially more efficient when the\nunderlying asset has high volatility, while it performs better than multilevel\nMonte Carlo for special cases of barrier options and underlying assets. These\ntheoretical findings are confirmed by numerous simulation results.\n

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