Valuation of forward start options under affine jump-diffusion models. Issue 5 (3rd May 2016)

• Record Type: Journal Article
• Authors: Nunes, João Pedro Vidal; Alcaria, Tiago Ramalho Viegas
• Is Part Of: Quantitative finance. Volume 16:Issue 5(2016)
• Page Start: 727
• Page End: 747
• Publication Date: 2016-05-03
• Subjects: Forward start options -- Stochastic volatility and interest rates -- Jump-diffusion processes -- Discrete Fourier transform -- Gaussian quadratures -- COS approximation; C63 -- G13; Finance -- Periodicals; Business mathematics -- Periodicals; Finance -- Mathematical models -- Periodicals; Investments -- Mathematics -- Periodicals; Economics -- Periodicals; Finances -- Modèles mathématiques -- Périodiques; 332.015118
• DOI: 10.1080/14697688.2015.1049200
• Languages: English
• ISSNs: 1469-7688

Abstract

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.