Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2006-07-27
Revision-Date: 2007-06-05
Number: 06-066/2
Author-Name: Roger Lord
Author-Email: roger.lord@rabobank.com
Author-Workplace-Name: Erasmus Universiteit Rotterdam, and Rabobank International
Author-Name: Christian Kahl
Author-Email: kahl@math.uni-wuppertal.de
Author-Workplace-Name: University of Wuppertal, and ABN AMRO, London
Title: Optimal Fourier Inversion in Semi-analytical Option Pricing
Abstract: At the time of writing this article, Fourier inversion is the computational method of choice for a fast and accurate calculation of plain vanilla option prices in models with an analytically available characteristic function. Shifting the contour of integration along the complex plane allows for different representations of the inverse Fourier integral. In this article, we present the optimal contour of the Fourier integral, taking into account numerical issues such as cancellation and explosion of the characteristic function. This allows for robust and fast option pricing for almost all levels of strikes and maturities.
Classification-JEL: C63; G13
Keywords: option pricing; Fourier inversion; Carr-Madan; Heston; stochastic volatility; characteristic function; damping; saddlepoint approximations
File-Url: https://papers.tinbergen.nl/06066.pdf
File-Format: application/pdf
File-Size: 736260 bytes
Handle: RePEc:tin:wpaper:20060066