Journal of Computational Finance

Risk.net

Wavelet-based bootstrap for pricing path-dependent European options

Huaguang Feng, Aparna Gupta, Thomas R. Willemain

ABSTRACT

In this paper we use the wavelet-based bootstrap (WBB) to implement a modelfree approach to pricing path-dependent European options. The wavelet-based bootstrap is a new way to create time series scenarios with complex dependence structures and arbitrary marginal distributions. We use the WBB to generate realistic price scenarios and then use them to price options through Monte Carlo simulations. For an assumed stochastic volatility model with either short- or long-range dependence, the model-free prices are shown to be very accurate.

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