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Parisian excursions of Brownian motion and their applications in mathematical finance

Lim, Jia Wei (2013) Parisian excursions of Brownian motion and their applications in mathematical finance. PhD thesis, London School of Economics and Political Science.

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In this thesis, we study Parisian excursions, which are defined as excursions of Brownian motion above or below a pre-determined barrier, exceeding a certain time length. Employing a new method, a recursion formula for the densities of single barrier and double barrier Parisian stopping times are computed. This new approach allows us to obtain a semi-closed form solution for the density of the one-sided stopping times, and does not require any numerical inversions of Laplace transforms. Further, it is backed by an intuitive argument which is premised on the recursive nature of the excursions and the strong Markov property of the Brownian motion. The same method is also employed in our computation of the two-sided and the double barrier Parisian stopping times. In turn, the resultant densities are used to price Parisian options. In particular, we provide numerical expressions for down-and-in Parisian calls. Additionally, we study the tail of the distribution of the two-sided Parisian stopping time. Based on the asymptotic properties of its distribution, we propose an approximation for the option prices, alleviating the heavy computational load arising from the recursions. Finally, we use the infinitesimal generator to obtain several results on other variations of Parisian excursions. Specifically, apart from the length, we are interested in the number of excursions and the maximum height achieved during an excursion. Using the same generator, we derive the joint Laplace transform of the occupation times of the Brownian motion above and below zero, but only starting the clock each time after a certain length.

Item Type: Thesis (PhD)
Additional Information: © 2013 Jia Wei Lim
Library of Congress subject classification: B Philosophy. Psychology. Religion > BC Logic
Sets: Departments > Philosophy, Logic and Scientific Method
Supervisor: Dassios, Angelos

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