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Pricing methods for α-quantile and perpetual early exercise options based on Spitzer identities

Phelan, C. E., Marazzina, D. and Germano, G. (2020) Pricing methods for α-quantile and perpetual early exercise options based on Spitzer identities. Quantitative Finance, 20 (6). 899 - 918. ISSN 1469-7688

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Identification Number: 10.1080/14697688.2020.1718192

Abstract

We present new numerical schemes for pricing perpetual Bermudan and American options as well as α-quantile options. This includes a new direct calculation of the optimal exercise boundary for early-exercise options. Our approach is based on the Spitzer identities for general Lévy processes and on the Wiener–Hopf method. Our direct calculation of the price of α-quantile options combines for the first time the Dassios–Port–Wendel identity and the Spitzer identities for the extrema of processes. Our results show that the new pricing methods provide excellent error convergence with respect to computational time when implemented with a range of Lévy processes.

Item Type: Article
Official URL: https://www.tandfonline.com/toc/rquf20/current
Additional Information: © 2020 The Authors
Divisions: Systemic Risk Centre
Subjects: H Social Sciences > HG Finance
Q Science > QA Mathematics
JEL classification: C - Mathematical and Quantitative Methods > C0 - General > C02 - Mathematical Methods
C - Mathematical and Quantitative Methods > C6 - Mathematical Methods and Programming > C60 - General
D - Microeconomics > D4 - Market Structure and Pricing > D40 - General
G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates
Date Deposited: 17 Mar 2020 16:09
Last Modified: 29 Jul 2020 09:00
URI: http://eprints.lse.ac.uk/id/eprint/103780

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