Efficient pricing of barrier options with the variance-gamma model

Avramidis, Athanassios.N., (2004) Efficient pricing of barrier options with the variance-gamma model Ingalls, R.G., Chen, C.H., Snowdon, J.L. and Charnes, J.M. (eds.) At Proceedings of the 2004 Winter Simulation Conference. , pp. 1574-1578. (doi:10.1109/WSC.2004.1371500).


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We develop an efficient Monte Carlo algorithm for pricing barrier options with the variance gamma model \cite{fMAD98a}. After generalizing the double-gamma bridge sampling algorithm of \citeN{fAVR03a}, we develop conditional bounds on the process paths and exploit these bounds to price barrier options. The algorithm's efficiency stems from sampling the process paths up to a random resolution that is usually much coarser than the original path resolution. We obtain unbiased estimators, including the case of continuous-time monitoring of the barrier crossing. Our numerical examples show large efficiency gain relative to full-dimensional path sampling.

Item Type: Conference or Workshop Item (Other)
Digital Object Identifier (DOI): doi:10.1109/WSC.2004.1371500
Venue - Dates: Proceedings of the 2004 Winter Simulation Conference, 2004-12-01
Related URLs:
Keywords: Monte Carlo algorithm, barrier option pricing, continuous-time monitoring, double-gamma bridge sampling algorithm, full-dimensional path sampling, variance-gamma model
Organisations: Operational Research
ePrint ID: 55794
Date :
Date Event
December 2004Published
Date Deposited: 06 Aug 2008
Last Modified: 16 Apr 2017 17:42
Further Information:Google Scholar
URI: http://eprints.soton.ac.uk/id/eprint/55794

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