Continuously monitored barrier options under Markov processes

Details Continuously monitored barrier options under Markov processes Continuously monitored barrier options under Markov processes

2009-08-27

arxiv.org/abs/0908.4028v2

Economy

Quantitative Finance

Pricing of Securities

35 pages, 5 figures, to appear in Mathematical Finance

Scientific paper

In this paper we present an algorithm for pricing barrier options in one-dimensional Markov models. The approach rests on the construction of an approximating continuous-time Markov chain that closely follows the dynamics of the given Markov model. We illustrate the method by implementing it for a range of models, including a local Levy process and a local volatility jump-diffusion. We also provide a convergence proof and error estimates for this algorithm.

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