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Efficient pricing of barrier options with the variance-gamma model

By Athanassios.N. Avramidis

Abstract

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

Topics: QA
Year: 2004
OAI identifier: oai:eprints.soton.ac.uk:55794
Provided by: e-Prints Soton

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Citations

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