IDEAS home Printed from https://ideas.repec.org/a/wsi/ijtafx/v12y2009i07ns0219024909005555.html
   My bibliography  Save this article

Barrier Option Pricing By Branching Processes

Author

Listed:
  • GEORGI K. MITOV

    (Institute of Mathematics and Informatics, Bulgarian Academy of Science, "Acad. G. Bonchev" Str., Bl. 8, 1113, Sofia Bulgaria;
    FinAnalytica Inc., Sofia Bulgaria)

  • SVETLOZAR T. RACHEV

    (School of Economics and Business Engineering, University of Karlsruhe and KIT, Kollegium am Schloss, Bau II, 20.12, R210, Postfach 6980, D-76128, Karlsruhe, Germany;
    Department of Statistics and Applied Probability, University of California, Santa Barbara, USA;
    FinAnalytica Inc., USA)

  • YOUNG SHIN KIM

    (Department of Statistics, Econometrics and Mathematical Finance, School of Economics and Business Engineering, University of Karlsruhe, Germany;
    KIT, Kollegium am Schloss, Bau II, 20.12, R210, Postfach 6980, D-76128, Karlsruhe, Germany)

  • FRANK J. FABOZZI

    (Yale School of Management, 135 Prospect Street, Box 208200, New Haven, CT 06520-8200, USA)

Abstract

This paper examines the pricing of barrier options when the price of the underlying asset is modeled by a branching process in a random environment (BPRE). We derive an analytical formula for the price of an up-and-out call option, one form of a barrier option. Calibration of the model parameters is performed using market prices of standard call options. Our results show that the prices of barrier options that are priced with the BPRE model deviate significantly from those modeled assuming a lognormal process, despite the fact that for standard options, the corresponding differences between the two models are relatively small.

Suggested Citation

  • Georgi K. Mitov & Svetlozar T. Rachev & Young Shin Kim & Frank J. Fabozzi, 2009. "Barrier Option Pricing By Branching Processes," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 12(07), pages 1055-1073.
    • Handle: RePEc:wsi:ijtafx:v:12:y:2009:i:07:n:s0219024909005555
    DOI: 10.1142/S0219024909005555
    as

    Download full text from publisher

    File URL: http://www.worldscientific.com/doi/abs/10.1142/S0219024909005555
    Download Restriction: Access to full text is restricted to subscribers
    File URL: https://libkey.io/10.1142/S0219024909005555?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Thomas W Epps, 2007. "Pricing Derivative Securities," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number 6243, February.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Ali Saeb, 2022. "Stock Prices as Janardan Galton Watson Process," Papers 2208.08496, arXiv.org.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Oleksandr Zhylyevskyy, 2010. "A fast Fourier transform technique for pricing American options under stochastic volatility," Review of Derivatives Research, Springer, vol. 13(1), pages 1-24, April.
    2. Olesia Verchenko, 2011. "Testing option pricing models: complete and incomplete markets," Discussion Papers 38, Kyiv School of Economics.
    3. Nikita Ratanov, 2020. "Kac–Lévy Processes," Journal of Theoretical Probability, Springer, vol. 33(1), pages 239-267, March.

    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:wsi:ijtafx:v:12:y:2009:i:07:n:s0219024909005555. 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.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with 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: Tai Tone Lim (email available below). General contact details of provider: http://www.worldscinet.com/ijtaf/ijtaf.shtml .

    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.