Chebyshev reduced basis function applied to option valuation

DOI10.1007/S10287-017-0287-4MaRDI QIDQ1789629zbMATH OpenOpenAlexFDO

Authors Javier de Frutos, Víctor Gatón

Publication date 10 October 2018

Published in Computational Management Science (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1701.01429

zbMATH Keywords

Chebyshev polynomialsderivative pricingmultidimensional interpolationreduced basis functions

Mathematics Subject Classification ID

Time series, auto-correlation, regression, etc. in statistics (GARCH) (62M10) Derivative securities (option pricing, hedging, etc.) (91G20) Numerical methods (including Monte Carlo methods) (91G60)

Abstract: We present a numerical method for the frequent pricing of financial derivatives that depends on a large number of variables. The method is based on the construction of a polynomial basis to interpolate the value function of the problem by means of a hierarchical orthogonalization process that allows to reduce the number of degrees of freedom needed to have an accurate representation of the value function. In the paper we consider, as an example, a GARCH model that depends on eight parameters and show that a very large number of contracts for different maturities and asset and parameters values can be valued in a small computational time with the proposed procedure. In particular the method is applied to the problem of model calibration. The method is easily generalizable to be used with other models or problems.

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Cited in

(6)

• An extension of Heston's SV model to stochastic interest rates
• Chebyshev interpolation for parametric option pricing
• Calibration of options on a reduced basis
• A pseudospectral method for option pricing with transaction costs under exponential utility
• A computational method to price with transaction costs under the nonlinear Black-Scholes model
• A reduced basis for option pricing

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