Efficiently pricing barrier options in a Markov-switching framework

JOURNAL OF COMPUTATIONAL AND APPLIED MATHEMATICS

卷:235

Article

Hieber, Peter¹  Scherer, Matthias¹ 

[1] Tech Univ Munich, HVB Inst Math Finance, D-85748 Garching, Germany

关键词: Markov switching;    Barrier option;    Monte Carlo;    Brownian bridge;    Variance reduction;   

DOI  :  10.1016/j.cam.2010.06.021

来源: Elsevier

【 摘 要 】

An efficient Monte Carlo simulation for the pricing of barrier options in a Markov-switching model is presented. Compared to a brute-force approach, relying on the simulation of discretized trajectories, the presented algorithm simulates the underlying stock price process only at state changes and at maturity. Given these pieces of information, option prices are evaluated using the probability of Brownian bridges not to fall below some threshold level. It is illustrated how two methods of variance reduction, control variates and antithetic variates, further improve the algorithm. In a small case study, the algorithm is applied to the pricing of options with the EuroStoxx 50 as underlying. (C) 2010 Elsevier B.V. All rights reserved.

【 授权许可】

Free