Barrier option pricing with heavy tailed distribution

Under the Generalized Extreme Value (GEV) model, Markose and Alerton (2011) derived the analytic form solutions for vanilla options, and also removed the distortion of the market only with an additional parameter. In this paper, we use the technique in Rubinstein and Reiner (1991) to get the analytic form solutions for barrier options by introducing the Corrected BS (CBS) model – the BS model close to the GEV model. By introducing CBS volatility we show that barrier option prices are continuous with respect to barriers under the GEV model. In addition, we present that the proposed model outdoes the BS model.