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Accepted version

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2017-07

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cc-by-nc-nd (c) Elsevier B.V., 2017
Please use this identifier to cite or link to this item: https://hdl.handle.net/2445/115444

Two-dimensional Shannon wavelet inverse Fourier technique for pricing European options

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https://doi.org/10.1016/j.apnum.2017.03.002

Abstract

The SWIFT method for pricing European-style options on one underlying asset was recently published and presented as an accurate, robust and highly efficient technique. The purpose of this paper is to extend the method to higher dimensions by pricing exotic option contracts, called rainbow options, whose payoff depends on multiple assets. The multidimensional extension inherits the properties of the one-dimensional method, being the exponential convergence one of them. Thanks to the nature of local Shannon wavelets basis, we do not need to rely on a-priori truncation of the integration range, we have an error bound estimate and we use fast Fourier transform (FFT) algorithms to speed up computations. We test the method for similar examples with state-of-the-art methods found in the literature, and we compare our results with analytical expressions when available.

Subject

Anàlisi de Fourier, Transformacions (Matemàtica), Anàlisi financera

Subject (English)

Fourier analysis, Transformations (Mathematics), Investment analysis

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Articles publicats en revistes (Econometria, Estadística i Economia Aplicada)

Citation

COLLDEFORNS PAPIOL, Gemma, ORTIZ GRACIA, Luis and OOSTERLEE, C. W. (Cornelis W.). Two-dimensional Shannon wavelet inverse Fourier technique for pricing European options. Applied Numerical Mathematics. 2017. Vol. 117, num. July, pags. 115-138. ISSN 0168-9274. [consulted: 13 of August of 2026]. Available at: https://hdl.handle.net/2445/115444

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