Product Markovian quantization of a diffusion process with applications to finance

DOI10.1007/S11009-018-9652-1MaRDI QIDQ2176359zbMATH OpenOpenAlexWikidataFDO

Authors Lucio Fiorin, Gilles Pagès, Abass Sagna

Publication date 4 May 2020

Published in Methodology and Computing in Applied Probability (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1511.01758

zbMATH Keywords

option pricingbackward stochastic differential equationpricingquantizationstochastic volatility model

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Numerical methods (including Monte Carlo methods) (91G60) Diffusion processes (60J60)

Abstract: We introduce a new approach to quantize the Euler scheme of an $mathbb{R}^d$-valued diffusion process. This method is based on a Markovian and componentwise product quantization and allows us, from a numerical point of view, to speak of {em fast online quantization} in dimension greater than one since the product quantization of the Euler scheme of the diffusion process and its companion weights and transition probabilities may be computed quite instantaneously. We show that the resulting quantization process is a Markov chain, then, we compute the associated companion weights and transition probabilities from (semi-) closed formulas. From the analytical point of view, we show that the induced quantization errors at the $k$-th discretization step $t_k$ is a cumulative of the marginal quantization error up to time $t_k$. Numerical experiments are performed for the pricing of a Basket call option, for the pricing of a European call option in a Heston model and for the approximation of the solution of backward stochastic differential equations to show the performances of the method.

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Cited in

(15)

• Recursive marginal quantization of the Euler scheme of a diffusion process
• Conic quantization: stochastic volatility and market implied liquidity
• A fully quantization-based scheme for FBSDEs
• Approximation of quantiles of components of diffusion processes.
• Optimal Quantization for Finance: From Random Vectors to Stochastic Processes
• Algorithmic trading in a microstructural limit order book model
• Functional quantization for numerics with an application to option pricing
• Quantization dimensions of compactly supported probability measures via Rényi dimensions
• Recursive marginal quantization of higher-order schemes
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• Quantization goes polynomial
• Weak and strong error analysis of recursive quantization: a general approach with an application to jump diffusions
• Quantiles of the Euler Scheme for Diffusion Processes and Financial Applications
• Numerical methods for backward stochastic differential equations: a survey
• Quantization methods for stochastic differential equations

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