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September 2014 A two-sided Laplace inversion algorithm with computable error bounds and its applications in financial engineering
Ning Cai, S. G. Kou, Zongjian Liu
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Adv. in Appl. Probab. 46(3): 766-789 (September 2014). DOI: 10.1239/aap/1409319559

Abstract

Transform-based algorithms have wide applications in applied probability, but rarely provide computable error bounds to guarantee the accuracy. We propose an inversion algorithm for two-sided Laplace transforms with computable error bounds. The algorithm involves a discretization parameter C and a truncation parameter N. By choosing C and N using the error bounds, the algorithm can achieve any desired accuracy. In many cases, the bounds decay exponentially, leading to fast computation. Therefore, the algorithm is especially suitable to provide benchmarks. Examples from financial engineering, including valuation of cumulative distribution functions of asset returns and pricing of European and exotic options, show that our algorithm is fast and easy to implement.

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Ning Cai. S. G. Kou. Zongjian Liu. "A two-sided Laplace inversion algorithm with computable error bounds and its applications in financial engineering." Adv. in Appl. Probab. 46 (3) 766 - 789, September 2014. https://doi.org/10.1239/aap/1409319559

Information

Published: September 2014
First available in Project Euclid: 29 August 2014

zbMATH: 1315.65106
MathSciNet: MR3254341
Digital Object Identifier: 10.1239/aap/1409319559

Subjects:
Primary: 91G20
Secondary: 44A10

Rights: Copyright © 2014 Applied Probability Trust

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Vol.46 • No. 3 • September 2014
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