Skip to main content
Article thumbnail
Location of Repository

A simple discretization scheme for nonnegative diffusion processes, with applications to option pricing

By Chantal Labb\'e, Bruno R\'emillard and Jean-Fran\c{c}ois Renaud

Abstract

A discretization scheme for nonnegative diffusion processes is proposed and the convergence of the corresponding sequence of approximate processes is proved using the martingale problem framework. Motivations for this scheme come typically from finance, especially for path-dependent option pricing. The scheme is simple: one only needs to find a nonnegative distribution whose mean and variance satisfy a simple condition to apply it. Then, for virtually any (path-dependent) payoff, Monte Carlo option prices obtained from this scheme will converge to the theoretical price. Examples of models and diffusion processes for which the scheme applies are provided.

OAI identifier: oai:RePEc:arx:papers:1011.3247
Download PDF:
Sorry, we are unable to provide the full text but you may find it at the following location(s):
  • http://arxiv.org/pdf/1011.3247 (external link)
  • Suggested articles


    To submit an update or takedown request for this paper, please submit an Update/Correction/Removal Request.