A two-dimensional, two-sided Euler inversion algorithm with computable error bounds and its financial applications

Abstract

Open AccessOpen Access licenseAboutSectionsView PDF ToolsAdd to favoritesDownload CitationsTrack Citations ShareShare onFacebookTwitterLinked InEmail Go to SectionOpen AccessOpen Access license HomeStochastic SystemsVol. 4, No. 2 A Two-dimensional, Two-sided Euler Inversion Algorithm with Computable Error Bounds and its Financial ApplicationsNing Cai, Chao ShiNing Cai, Chao ShiPublished Online:23 Mar 2015https://doi.org/10.1287/12-SSY094AbstractIn this paper we propose an inversion algorithm with computable error bounds for two-dimensional, two-sided Laplace transforms. The algorithm consists of two discretization parameters and two truncation parameters. Based on the computable error bounds, we can select these parameters appropriately to achieve any desired accuracy. Hence this algorithm is particularly useful to provide benchmarks. In many cases, the error bounds decay quickly (e.g., exponentially), making the algorithm very efficient. We apply this algorithm to price exotic options such as spread options and barrier options under various asset pricing models as well as to evaluate the joint cumulative distribution functions of related state variables. The numerical examples indicate that the inversion algorithm is accurate, fast and easy to implement. Previous Back to Top Next FiguresReferencesRelatedInformationCited byA Computational Approach to First Passage Problems of Reflected Hyperexponential Jump Diffusion ProcessesNing Cai, Xuewei Yang22 June 2020 | INFORMS Journal on Computing, Vol. 33, No. 1 Volume 4, Issue 2December 2014Pages 321-603 Article Information Metrics Information Received:January 01, 2013Published Online:March 23, 2015 Copyright © 2014, The author(s)Cite asNing Cai, Chao Shi (2015) A Two-dimensional, Two-sided Euler Inversion Algorithm with Computable Error Bounds and its Financial Applications. Stochastic Systems 4(2):404-448. https://doi.org/10.1287/12-SSY094 KeywordsTwo-dimensional Laplace inversiontwo-sided Laplace transformsEuler inversioncomputable error boundsdiscretization errorstruncation errorsoption pricingexotic optionsPDF download