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Register a new userPricing methods for $alpha$-quantile and perpetual early exercise options based on Spitzer identities
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We present new numerical schemes for pricing perpetual Bermudan and American options as well as $alpha$-quantile options. This includes a new direct calculation of the optimal exercise barrier for early-exercise options. Our approach is based on the Spitzer identities for general Levy processes and on the Wiener-Hopf method. Our direct calculation of the price of $alpha$-quantile options combines for the first time the Dassios-Port-Wendel identity and the Spitzer identities for the extrema of processes. Our results show that the new pricing methods provide excellent error convergence with respect to computational time when implemented with a range of Levy processes.
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This paper presents the Runge-Kutta-Legendre finite difference scheme, allowing for an additional shift in its polynomial representation. A short presentation of the stability region, comparatively to the Runge-Kutta-Chebyshev scheme follows. We then explore the problem of pricing American options with the Runge-Kutta-Legendre scheme under the one factor Black-Scholes and the two factor Heston stochastic volatility models, as well as the pricing of butterfly spread and digital options under the uncertain volatility model, where a Hamilton-Jacobi-Bellman partial differential equation needs to be solved. We explore the order of convergence in these problems, as well as the option greeks stability, compared to the literature and popular schemes such as Crank-Nicolson, with Rannacher time-stepping.
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