Leverage characteristic functions when densities are unavailable

Extend the American option decomposition-and-EEP methodology to operate directly with characteristic functions—such as via the COS method—so that models without closed-form transition densities but with known characteristic functions can be accommodated.

Background

Many models used in practice do not admit closed-form transition densities, but do admit closed-form characteristic functions, making Fourier-based pricing attractive.

The authors identify as an open problem the extension of the decomposition approach to exploit characteristic functions directly, broadening the method’s applicability.