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Exotic options pricing under special Lévy process models: A biased control variate method approach

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  • Jia, Jiayi
  • Lai, Yongzeng
  • Li, Lin
  • Tan, Vinna

Abstract

Option pricing plays an important role in financial engineering. No explicit formulas can be derived for many exotic options when the underlying asset prices follow more realistic models. The Monte Carlo simulation method is the only feasible approach to obtain numerical values of these options usually. To overcome the slow convergence – the main drawback for the Monte Carlo method, variance reduction and quasi-Monte Carlo methods are proposed. This paper proposes the application of biased control variate method to speed up the evaluation of exotic options prices by simulations under a special type of Lévy processes. We construct very efficient biased control variates for both fixed and floating strike lookback options, as well as barrier options.

Suggested Citation

  • Jia, Jiayi & Lai, Yongzeng & Li, Lin & Tan, Vinna, 2020. "Exotic options pricing under special Lévy process models: A biased control variate method approach," Finance Research Letters, Elsevier, vol. 34(C).
    • Handle: RePEc:eee:finlet:v:34:y:2020:i:c:s1544612319303320
    DOI: 10.1016/j.frl.2019.07.022
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    References listed on IDEAS

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    1. Nick Webber & Claudia Ribeiro, 2003. "A Monte Carlo Method for the Normal Inverse Gaussian Option Valuation Model using an Inverse Gaussian Bridge," Computing in Economics and Finance 2003 5, Society for Computational Economics.
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    Cited by:

    1. Lu, Jin-Ray & Yang, Ya-Huei, 2021. "Option valuations and asset demands and supplies," The Quarterly Review of Economics and Finance, Elsevier, vol. 80(C), pages 49-64.

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