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Article: LAPLACE BOUNDS APPROXIMATION FOR AMERICAN OPTIONS

TitleLAPLACE BOUNDS APPROXIMATION FOR AMERICAN OPTIONS
Authors
KeywordsAmerican option pricing
early exercise boundary
jump diffusions
Laplace transform
option bounds
Issue Date2022
Citation
Probability in the Engineering and Informational Sciences, 2022, v. 36, n. 2, p. 514-547 How to Cite?
AbstractIn this paper, we develop the lower-upper-bound approximation in the space of Laplace transforms for pricing American options. We construct tight lower and upper bounds for the price of a finite-maturity American option when the underlying stock is modeled by a large class of stochastic processes, e.g. a time-homogeneous diffusion process and a jump diffusion process. The novelty of the method is to first take the Laplace transform of the price of the corresponding capped (barrier) option with respect to the time to maturity, and then carry out optimization procedures in the Laplace space. Finally, we numerically invert the Laplace transforms to obtain the lower bound of the price of the American option and further utilize the early exercise premium representation in the Laplace space to obtain the upper bound. Numerical examples are conducted to compare the method with a variety of existing methods in the literature as benchmark to demonstrate the accuracy and efficiency.
Persistent Identifierhttp://hdl.handle.net/10722/327718
ISSN
2023 Impact Factor: 0.7
2023 SCImago Journal Rankings: 0.434
ISI Accession Number ID

 

DC FieldValueLanguage
dc.contributor.authorMa, Jingtang-
dc.contributor.authorCui, Zhenyu-
dc.contributor.authorLi, Wenyuan-
dc.date.accessioned2023-04-24T05:09:28Z-
dc.date.available2023-04-24T05:09:28Z-
dc.date.issued2022-
dc.identifier.citationProbability in the Engineering and Informational Sciences, 2022, v. 36, n. 2, p. 514-547-
dc.identifier.issn0269-9648-
dc.identifier.urihttp://hdl.handle.net/10722/327718-
dc.description.abstractIn this paper, we develop the lower-upper-bound approximation in the space of Laplace transforms for pricing American options. We construct tight lower and upper bounds for the price of a finite-maturity American option when the underlying stock is modeled by a large class of stochastic processes, e.g. a time-homogeneous diffusion process and a jump diffusion process. The novelty of the method is to first take the Laplace transform of the price of the corresponding capped (barrier) option with respect to the time to maturity, and then carry out optimization procedures in the Laplace space. Finally, we numerically invert the Laplace transforms to obtain the lower bound of the price of the American option and further utilize the early exercise premium representation in the Laplace space to obtain the upper bound. Numerical examples are conducted to compare the method with a variety of existing methods in the literature as benchmark to demonstrate the accuracy and efficiency.-
dc.languageeng-
dc.relation.ispartofProbability in the Engineering and Informational Sciences-
dc.subjectAmerican option pricing-
dc.subjectearly exercise boundary-
dc.subjectjump diffusions-
dc.subjectLaplace transform-
dc.subjectoption bounds-
dc.titleLAPLACE BOUNDS APPROXIMATION FOR AMERICAN OPTIONS-
dc.typeArticle-
dc.description.naturelink_to_subscribed_fulltext-
dc.identifier.doi10.1017/S0269964820000492-
dc.identifier.scopuseid_2-s2.0-85095431087-
dc.identifier.volume36-
dc.identifier.issue2-
dc.identifier.spage514-
dc.identifier.epage547-
dc.identifier.eissn1469-8951-
dc.identifier.isiWOS:000778571200019-

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