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A two-sided Laplace inversion algorithm with computable error bounds and its applications in financial engineering. (English) Zbl 1315.65106

The authors propose an inversion algorithm with computable error bounds for two-sided Laplace transforms. Using this technique, their contribution is threefold: 1) they derive a two-sided Laplace inversion formula that involves a discretization parameter and a truncation parameter; 2) the bounds for the discretization and truncation errors are computable; 3) the error bounds decay exponentially, leading to fast computation. As an example they price European and exotic options, showing that their algorithm is fast and easy to implement.

MSC:

65R10 Numerical methods for integral transforms
44A10 Laplace transform
60J75 Jump processes (MSC2010)
91G60 Numerical methods (including Monte Carlo methods)
91G20 Derivative securities (option pricing, hedging, etc.)
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References:

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