The joint distribution of Parisian and hitting times of the Brownian motion with application to Parisian option pricing
Dassios, A.
& Zhang, Y. Y.
(2016).
The joint distribution of Parisian and hitting times of the Brownian motion with application to Parisian option pricing.
Finance and Stochastics,
20, 773-804.
https://doi.org/10.1007/s00780-016-0302-6
& Zhang, Y. Y.
(2016).
The joint distribution of Parisian and hitting times of the Brownian motion with application to Parisian option pricing.
Finance and Stochastics,
20, 773-804.
https://doi.org/10.1007/s00780-016-0302-6
We study the joint law of Parisian time and hitting time of a drifted Brownian motion by using a three-state semi-Markov model, obtained through perturbation. We obtain a martingale, to which we can apply the optional sampling theorem and derive the double Laplace transform. This general result is applied to address problems in option pricing. We introduce a new option related to Parisian options, being triggered when the age of an excursion exceeds a certain time or/and a barrier is hit. We obtain an explicit expression for the Laplace transform of its fair price.