The goal of this paper is to investigate the method outlined by one of us (P. R.) in Cherubini, U., Della Lunga, G., Mulinacci, S. and Rossi, P. [Fourier Transform Methods in Finance, 2009 (John Wiley & Sons Inc.).] to compute option prices. We name it the SINC approach. While the COS method by Fang, F. and Oosterlee, C.W. [A novel pricing method for european options based on Fourier-cosine series expansions. SIAM. J. Sci. Comput., 2009, 31(2), 826–848.] leverages the Fourier-cosine expansion of truncated densities, the SINC approach builds on the Shannon Sampling Theorem revisited for functions with bounded support. We provide several results which were missing in the early derivation: (i) a rigorous proof of the convergence of the SINC formula to the correct option price when the support grows and the number of Fourier frequencies increases; (ii) ready to implement formulas for put, Cash-or-Nothing, and Asset-or-Nothing options; (iii) a systematic comparison with the COS formula for several log-price models; iv) a numerical challenge against alternative Fast Fourier specifications, such as Carr, P. and Madan, D. [Option valuation using the fast Fourier transform. J. Comput. Finance, 1999, 2(4), 61–73.] and Lewis, A.L. [Option Valuation Under Stochastic Volatility with Mathematica Code, 2000 (Newport Beach: Finance Press).]; (v) an extensive pricing exercise under the rough Heston model of Jaisson, T. and Rosenbaum, M. [Limit theorems for nearly unstable Hawkes processes. Ann. Appl. Probab., 2015, 25(2), 600–631.]; (vi) formulas to evaluate numerically the moments of a truncated density. The advantages of the SINC approach are numerous. When compared to benchmark methodologies, SINC provides the most accurate and fast pricing computation. The method naturally lends itself to price all options in a smile concurrently by means of Fast Fourier techniques, boosting fast calibration. Pricing requires resorting only to odd moments in the Fourier space.

The SINC way: a fast and accurate approach to Fourier pricing

Bormetti Giacomo;
2022-01-01

Abstract

The goal of this paper is to investigate the method outlined by one of us (P. R.) in Cherubini, U., Della Lunga, G., Mulinacci, S. and Rossi, P. [Fourier Transform Methods in Finance, 2009 (John Wiley & Sons Inc.).] to compute option prices. We name it the SINC approach. While the COS method by Fang, F. and Oosterlee, C.W. [A novel pricing method for european options based on Fourier-cosine series expansions. SIAM. J. Sci. Comput., 2009, 31(2), 826–848.] leverages the Fourier-cosine expansion of truncated densities, the SINC approach builds on the Shannon Sampling Theorem revisited for functions with bounded support. We provide several results which were missing in the early derivation: (i) a rigorous proof of the convergence of the SINC formula to the correct option price when the support grows and the number of Fourier frequencies increases; (ii) ready to implement formulas for put, Cash-or-Nothing, and Asset-or-Nothing options; (iii) a systematic comparison with the COS formula for several log-price models; iv) a numerical challenge against alternative Fast Fourier specifications, such as Carr, P. and Madan, D. [Option valuation using the fast Fourier transform. J. Comput. Finance, 1999, 2(4), 61–73.] and Lewis, A.L. [Option Valuation Under Stochastic Volatility with Mathematica Code, 2000 (Newport Beach: Finance Press).]; (v) an extensive pricing exercise under the rough Heston model of Jaisson, T. and Rosenbaum, M. [Limit theorems for nearly unstable Hawkes processes. Ann. Appl. Probab., 2015, 25(2), 600–631.]; (vi) formulas to evaluate numerically the moments of a truncated density. The advantages of the SINC approach are numerous. When compared to benchmark methodologies, SINC provides the most accurate and fast pricing computation. The method naturally lends itself to price all options in a smile concurrently by means of Fast Fourier techniques, boosting fast calibration. Pricing requires resorting only to odd moments in the Fourier space.
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11571/1497006
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