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Pricing discretely-monitored double barrier options with small probabilities of execution

Kontosakos, Vasileios E. and Mendonca, Keegan and Pantelous, Athanasios A. and Zuev, Konstantin M. (2021) Pricing discretely-monitored double barrier options with small probabilities of execution. European Journal of Operational Research, 290 (1). pp. 313-330. ISSN 0377-2217.

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In this paper, we propose a new stochastic simulation-based methodology for pricing discretely-monitored double barrier options and estimating the corresponding probabilities of execution. We develop our framework by employing a versatile tool for the estimation of rare event probabilities known as subset simulation algorithm. In this regard, considering plausible dynamics for the price evolution of the underlying asset, we are able to compare and demonstrate clearly that our treatment always outperforms the standard Monte Carlo approach and becomes substantially more efficient (measured in terms of the sample coefficient of variation) when the underlying asset has high volatility and the barriers are set close to the spot price of the underlying asset. In addition, we test and report that our approach performs better when it is compared to the multilevel Monte Carlo method for special cases of barrier options and underlying assets that make the pricing problem a rare event estimation. These theoretical findings are confirmed by numerous simulation results.

Item Type:Article
Related URLs:
URLURL TypeDescription Paper Paper
Mendonca, Keegan0000-0002-5024-6186
Pantelous, Athanasios A.0000-0001-5738-1471
Zuev, Konstantin M.0000-0003-2174-700X
Alternate Title:Efficient Pricing of Barrier Options on High Volatility Assets using Subset Simulation
Additional Information:© 2020 Elsevier B.V. Received 26 September 2019, Revised 18 July 2020, Accepted 21 July 2020, Available online 26 July 2020. We are extremely grateful to the three anonymous reviewers and handling editor Emanuele Borgonovo who have afforded us considerable assistance in enhancing both the quality of the findings and the clarity of their presentation. The authors would like to thank Siu-Kui (Ivan) Au, James Beck, Damiano Brigo, Gianluca Fusai, Otto Konstadatos, Steven Kou, Ioannis Kyriakou, Zili Zhu, and the participants at the Global Finance 2018, Quantitative Methods in Finance 2018 and Quantitative Finance and Risk Analysis 2019 Conferences and seminars at Caltech, University of Liverpool, Monash University and Shanghai University for helpful comments. Any remaining errors are ours.
Subject Keywords:Simulation; Barrier options pricing; Rare event; Path–dependent derivatives; Discrete monitoring
Issue or Number:1
Classification Code:JEL: G13; C15
Record Number:CaltechAUTHORS:20200727-091611276
Persistent URL:
Official Citation:Vasileios E. Kontosakos, Keegan Mendonca, Athanasios A. Pantelous, Konstantin M. Zuev, Pricing discretely-monitored double barrier options with small probabilities of execution, European Journal of Operational Research, Volume 290, Issue 1, 2021, Pages 313-330, ISSN 0377-2217, (
Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:104583
Deposited By: Tony Diaz
Deposited On:28 Jul 2020 17:00
Last Modified:21 Dec 2020 18:59

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