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http://hdl.handle.net/10071/12165
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Title: Valuation of forward start options under affine jump-diffusion models
Authors: Nunes, J. P. V.
Alcaria, T. R. V.
Keywords: Forward start options
Stochastic volatility and interest rates
Jump-diffusion processes
Discrete Fourier transform
Gaussian quadratures
COS approximation
Issue Date: 2016
Publisher: Routledge/Taylor and Francis
Abstract: Under the general affine jump-diffusion framework of Duffie et al. [Econometrica, 2000, 68, 1343–1376], this paper proposes an alternative pricing methodology for European-style forward start options that does not require any parallel optimization routine to ensure square integrability. Therefore, the proposed methodology is shown to possess a better accuracy–efficiency trade-off than the usual and more general approach initiated by Hong [Forward Smile and Derivative Pricing. Working paper, UBS, 2004] that is based on the knowledge of the forward characteristic function. Explicit pricing solutions are also offered under the nested jump-diffusion setting proposed by Bakshi et al. [J. Finance, 1997, 52, 2003–2049], which accommodates stochastic volatility and stochastic interest rates, and different integration schemes are numerically tested.
Peer reviewed: yes
URI: http://hdl.handle.net/10071/12165
DOI: 10.1080/14697688.2015.1049200
ISSN: 1469-7688
Ciência-IUL: https://ciencia.iscte-iul.pt/id/ci-pub-26344
Accession number: WOS:000373839800001
Appears in Collections:BRU-RI - Artigos em revistas científicas internacionais com arbitragem científica

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