A lattice algorithm for pricing moving average barrier options

Min Dai, Peifan Li, Jin E. Zhang

Research output: Journal article publicationJournal articleAcademic researchpeer-review

14 Citations (Scopus)

Abstract

This paper presents a lattice algorithm for pricing both European- and American-style moving average barrier options (MABOs). We develop a finite-dimensional partial differential equation (PDE) model for discretely monitored MABOs and solve it numerically by using a forward shooting grid method. The modeling PDE for continuously monitored MABOs has infinite dimensions and cannot be solved directly by any existing numerical method. We find their approximate values indirectly by using an extrapolation technique with the prices of discretely monitored MABOs. Numerical experiments show that our algorithm is very efficient.

Original languageEnglish
Pages (from-to)542-554
Number of pages13
JournalJournal of Economic Dynamics and Control
Volume34
Issue number3
DOIs
Publication statusPublished - Mar 2010

Keywords

  • Barrier option
  • Extrapolation
  • Forward shooting grid method
  • Lattice algorithm
  • Moving average

ASJC Scopus subject areas

  • Economics and Econometrics
  • Control and Optimization
  • Applied Mathematics

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