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Double-barrier first-passage times of jump-diffusion processes. (English) Zbl 1410.91446

Summary: Required in a wide range of applications in, e.g., finance, engineering, and physics, first-passage time problems have attracted considerable interest over the past decades. Since analytical solutions often do not exist, one strand of research focuses on fast and accurate numerical techniques. In this paper, we present an efficient and unbiased Monte-Carlo simulation to obtain double-barrier first-passage time probabilities of a jump-diffusion process with arbitrary jump size distribution; extending single-barrier results by S. A.K. Metwally and A. F. Atiya [“Using Brownian bridge for fast simulation of jump-diffusion processes and barrier options”, J. Deriv. 10, No. 1, 43–54 (2002; doi:10.3905/jod.2002.319189)]. In mathematical finance, the double-barrier first-passage time is required to price exotic derivatives, for example corridor bonus certificates, (step) double barrier options, or digital first-touch options, that depend on whether or not the underlying asset price exceeds certain threshold levels. Furthermore, it is relevant in structural credit risk models if one considers two exit events, e.g., default and early repayment.

MSC:

91G20 Derivative securities (option pricing, hedging, etc.)
60G51 Processes with independent increments; Lévy processes
91G60 Numerical methods (including Monte Carlo methods)
65Y20 Complexity and performance of numerical algorithms
58J65 Diffusion processes and stochastic analysis on manifolds
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