We consider a defaultable asset whose risk-neutral pricing dynamics are described by an exponential Lévy-type martingale. This class of models allows for a local volatility, local default intensity and a locally dependent Lévy measure. We present a pricing method for Bermudan options based on an analytical approximation of the characteristic function combined with the COS method. Due to a special form of the obtained characteristic function the price can be computed using a fast Fourier transform-based algorithm resulting in a fast and accurate calculation.
Borovykh, A., Pascucci, A., Oosterlee, C.W. (2017). Bermudan option valuation under state-dependent models. Springer New York LLC [10.1007/978-3-319-66536-8_6].
Bermudan option valuation under state-dependent models
Borovykh, Anastasia
Membro del Collaboration Group
;Pascucci, Andrea
Membro del Collaboration Group
;
2017
Abstract
We consider a defaultable asset whose risk-neutral pricing dynamics are described by an exponential Lévy-type martingale. This class of models allows for a local volatility, local default intensity and a locally dependent Lévy measure. We present a pricing method for Bermudan options based on an analytical approximation of the characteristic function combined with the COS method. Due to a special form of the obtained characteristic function the price can be computed using a fast Fourier transform-based algorithm resulting in a fast and accurate calculation.| File | Dimensione | Formato | |
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