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Original Articles

Efficiently pricing continuously monitored barrier options under stochastic volatility model with jumps

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Pages 2166-2177 | Received 09 Oct 2015, Accepted 06 May 2016, Published online: 23 Aug 2016
 

ABSTRACT

Stochastic volatility model with jumps fits almost perfectly the empirical implied volatility surface. Under this model, this paper considers continuously monitored barrier options pricing by Monte Carlo simulation. Based on quadratic exponential scheme, this paper develops an algorithm for pricing barrier options and provides convergence of the algorithm by moment-matching techniques. Variance reduction technique based on control variates further improves the efficiency of the algorithm. The algorithm is also extended to stochastic volatility model with contemporaneous jumps in variance and stock price. Simulations show that the proposed algorithm is efficient and easy to implement. Compared to contemporaneous jumps in variance and stock price, only jumps in stock price produce more profound impact on barrier options prices.

2010 AMS Subject Classifications:

Acknowledgments

The authors are very grateful for the anonymous referees suggestions and helpful comments.

Disclosure statement

No potential conflict of interest was reported by the authors.

Additional information

Funding

This work is supported by the National Natural Science Foundation of China [grant no. 11426176] and the Fundamental Research Funds for the Central Universities [grant no. 3102015JCS05011].

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