Algebraic structure of vector fields in financial diffusion models and its applications

DOI10.1080/14697688.2016.1264618MaRDI QIDQ4555127zbMATH OpenOpenAlexFDO

Authors Yusuke Morimoto, M. Sasada

Publication date 19 November 2018

Published in Quantitative Finance (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1510.02013

zbMATH Keywords

computational financeHeston modelLie algebraoption pricingSABR model

Mathematics Subject Classification ID

Lie algebras and Lie superalgebras (17B99) Stochastic ordinary differential equations (aspects of stochastic analysis) (60H10) Derivative securities (option pricing, hedging, etc.) (91G20)

Abstract: High order discretization schemes of SDEs by using free Lie algebra valued random variables are introduced by Kusuoka, Lyons-Victoir, Ninomiya-Victoir and Ninomiya-Ninomiya. These schemes are called KLNV methods. They involve solving the flows of vector fields associated with SDEs and it is usually done by numerical methods. The authors found a special Lie algebraic structure on the vector fields in the major financial diffusion models. Using this structure, we can solve the flows associated with vector fields analytically and efficiently. Numerical examples show that our method saves the computation time drastically.

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Cites work

• A new higher-order weak approximation scheme for stochastic differential equations and the Runge-Kutta method
• Approximation of expectation of diffusion processes based on Lie algebra and Malliavin calculus
• Cubature on Wiener space
• Efficient computation of the Zassenhaus formula
• Gaussian K-scheme: justification for KLNV method
• High order discretization schemes for the CIR process: application to affine term structure and heston models
• On the convergence of exponential operators-the Zassenhaus formula, BCH formula and systematic approximants
• Semi-closed form cubature and applications to financial diffusion models
• Weak Approximation of Stochastic Differential Equations and Application to Derivative Pricing

Cited in

(4)

• Invariant Algebraic Surfaces and Hopf Bifurcation of a Finance Model
• Construction of a third-order K-scheme and its application to financial models
• A second-order discretization with Malliavin weight and Quasi-Monte Carlo method for option pricing
• Efficient simulation methods for the quasi-Gaussian term-structure model with volatility smiles: practical applications of the KLNV-scheme

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