Multinomial method for option pricing under Variance Gamma

This paper presents a multinomial method for option pricing when the underlying asset follows an exponential Variance Gamma (VG) process. The continuous time VG process is approximated by a continuous time process with the same first four cumulants and then discretized in time and space. This approa...

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Bibliographic Details
Published in:International journal of computer mathematics 2019-06, Vol.96 (6), p.1087-1106
Main Authors: Cantarutti, Nicola, Guerra, João
Format: Article
Language:English
Subjects:
American option
Economic models
Lévy processes
moment matching
multinomial tree
Pricing
Variance Gamma
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Summary:This paper presents a multinomial method for option pricing when the underlying asset follows an exponential Variance Gamma (VG) process. The continuous time VG process is approximated by a continuous time process with the same first four cumulants and then discretized in time and space. This approach is particularly convenient for pricing American and Bermudan options, which can be exercised before the expiration date. Numerical computations of European and American options are presented and compared with results obtained with finite differences method and with the Black-Scholes prices.
ISSN:0020-7160
1029-0265
DOI:10.1080/00207160.2018.1427853