English, Article edition: ON ERRORS AND BIAS OF FOURIER TRANSFORM METHODS IN QUADRATIC TERM STRUCTURE MODELS NINA BOYARCHENKO; SERGEI LEVENDORSKIÇ

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Bookmark: http://trove.nla.gov.au/version/82831
Physical Description
  • article
Language
  • English

Edition details

Title
  • ON ERRORS AND BIAS OF FOURIER TRANSFORM METHODS IN QUADRATIC TERM STRUCTURE MODELS
Author
  • NINA BOYARCHENKO
  • SERGEI LEVENDORSKIÇ
Physical Description
  • article
Notes
  • We analyze and compare the performance of the Fourier transform method in affine and quadratic term structure models. We explain why the method of the reduction to FFT in dimension 1 is efficient for ATSMs of type A0(n), but may lead to sizable errors for QTSMs unless computational errors are taken into account properly. We suggest a certain improvement and generalization which make FFT more accurate and, for the same precision, faster than the Leippold and Wu [M. Leippold and L. Wu, Option pricing under the quadratic class, Journal of Financial and Quantitative Analysis 37(2) (2002) 271â295] method. We deduce simple general recommendations for the choice of parameters of computational schemes for QTSMs, which ensure a given precision, and an approximate formula for the bias which FFT produces.
  • Derivative pricing, quadratic term structure models, Fourier transform, fast Fourier transform
  • RePEc:wsi:ijtafx:v:10:y:2007:i:02:p:273-306
Language
  • English
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