IDEAS home Printed from https://ideas.repec.org/a/rsk/journ0/2478737.html
   My bibliography  Save this article

Error analysis in Fourier methods for option pricing

Author

Listed:
  • Fabián Crocce
  • Juho Häppölä
  • Jonas Kiessling
  • Raul Tempone

Abstract

We provide a bound for the error committed when using a Fourier method to price European options, when the underlying follows an exponential Lévy dynamic. The price of the option is described by a partial integro-differential equation (PIDE). Applying a Fourier transformation to the PIDE yields an ordinary differential equation (ODE) that can be solved analytically in terms of the characteristic exponent of the Lévy process. Then, a numerical inverse Fourier transform allows us to obtain the option price. We present a bound for the error and use this bound to set the parameters for the numerical method. We analyze the properties of the bound and demonstrate the minimization of the bound to select parameters for a numerical Fourier transformation method in order to solve the option price efficiently.

Suggested Citation

Handle: RePEc:rsk:journ0:2478737
as

Download full text from publisher

File URL: https://www.risk.net/system/files/digital_asset/2017-03/Error_analysis_in_Fourier_methods_for_option_pricing.pdf
Download Restriction: no
---><---

More about this item

Statistics

Access and download statistics

Corrections

All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:rsk:journ0:2478737. See general information about how to correct material in RePEc.

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

We have no bibliographic references for this item. You can help adding them by using this form .

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Thomas Paine (email available below). General contact details of provider: https://www.risk.net/journal-of-computational-finance .

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.