Lookback options and diffusion hitting times: A spectral expansion approach

Vadim Linetsky*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

52 Scopus citations

Abstract

Lookback options have payoffs dependent on the maximum and/or minimum of the underlying price attained during the option's lifetime. Based on the relationship between diffusion maximum and minimum and hitting times and the spectral decomposition of diffusion hitting times, this paper gives an analytical characterization of lookback option prices in terms of spectral expansions. In particular, analytical solutions for lookback options under the constant elasticity of variance (CEV) diffusion are obtained.

Original languageEnglish (US)
Pages (from-to)373-398
Number of pages26
JournalFinance and Stochastics
Volume8
Issue number3
DOIs
StatePublished - Aug 1 2004

Keywords

  • Bessel process
  • CEV model
  • Diffusion maximum and minimum
  • Hitting times
  • Lookback options
  • Spectral expansions

ASJC Scopus subject areas

  • Statistics and Probability
  • Finance
  • Statistics, Probability and Uncertainty

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