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A Matched Asymptotic Expansions Approach to Continuity Corrections for Discretely Sampled Options. Part 1: Barrier Options

A Matched Asymptotic Expansions Approach to Continuity Corrections for Discretely Sampled... This paper discusses the ‘continuity correction’ that should be applied to relate the prices of discretely sampled barrier options and their continuously‐sampled equivalents. Using a matched asymptotic expansions approach it is shown that the correction of Broadie, Glasserman & Kou (Mathematical Finance 7, 325 (1997)) can be applied in a very wide variety of cases. The correction to higher order is calculated in terms of the expansion parameter (the scaled time between resets) and it is shown how to apply the correction in jump‐diffusion and local volatility models. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Applied Mathematical Finance Taylor & Francis

A Matched Asymptotic Expansions Approach to Continuity Corrections for Discretely Sampled Options. Part 1: Barrier Options

Howison, Sam; Steinberg, Mario
Applied Mathematical Finance , Volume 14 (1): 27 – Feb 1, 2007
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27 pages

A Matched Asymptotic Expansions Approach to Continuity Corrections for Discretely Sampled Options. Part 1: Barrier Options

Abstract

This paper discusses the ‘continuity correction’ that should be applied to relate the prices of discretely sampled barrier options and their continuously‐sampled equivalents. Using a matched asymptotic expansions approach it is shown that the correction of Broadie, Glasserman & Kou (Mathematical Finance 7, 325 (1997)) can be applied in a very wide variety of cases. The correction to higher order is calculated in terms of the expansion parameter (the scaled time between...
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Publisher
Taylor & Francis
Copyright
Copyright Taylor & Francis Group, LLC
ISSN
1466-4313
eISSN
1350-486X
DOI
10.1080/13504860600858402
Publisher site
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Abstract

This paper discusses the ‘continuity correction’ that should be applied to relate the prices of discretely sampled barrier options and their continuously‐sampled equivalents. Using a matched asymptotic expansions approach it is shown that the correction of Broadie, Glasserman & Kou (Mathematical Finance 7, 325 (1997)) can be applied in a very wide variety of cases. The correction to higher order is calculated in terms of the expansion parameter (the scaled time between resets) and it is shown how to apply the correction in jump‐diffusion and local volatility models.

Journal

Applied Mathematical Finance – Taylor & Francis

Published: Feb 1, 2007

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