Functional Itô calculus, path-dependence and the computation of Greeks

DOI10.1016/J.SPA.2017.03.015zbMATH Open1377.60065arXiv1311.3881OpenAlexW1646613531MaRDI QIDQ1679474FDOQ1679474

Authors: Samy Jazaerli, Yuri F. Saporito 

Publication date: 9 November 2017

Published in: Stochastic Processes and their Applications (Search for Journal in Brave)

Abstract: Dupire's functional It^o calculus provides an alternative approach to the classical Malliavin calculus for the computation of sensitivities, also called Greeks, of path-dependent derivatives prices. In this paper, we introduce a measure of path-dependence of functionals within the functional It^o calculus framework. Namely, we consider the Lie bracket of the space and time functional derivatives, which we use to classify functionals accordingly to their degree of path-dependence. We then revisit the problem of efficient numerical computation of Greeks for path-dependent derivatives using integration by parts techniques. Special attention is paid to path-dependent functionals with zero Lie bracket, called locally weakly path-dependent functionals in our classification. Hence, we derive the weighted-expectation formulas for their Greeks. In the more general case of fully path-dependent functionals, we show that, equipped with the functional It^o calculus, we are able to analyze the effect of the Lie bracket on the computation of Greeks. Moreover, we are also able to consider the more general dynamics of path-dependent volatility. These were not achieved using Malliavin calculus.

Full work available at URL: https://arxiv.org/abs/1311.3881

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zbMATH Keywords

Monte Carlo methodspath-dependenceGreeksfunctional Itô calculus

Mathematics Subject Classification ID

Monte Carlo methods (65C05) Derivative securities (option pricing, hedging, etc.) (91G20) Stochastic integrals (60H05) Applications of stochastic analysis (to PDEs, etc.) (60H30)

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Cited In (19)

• Computation of first-order greeks for barrier options using chain rules for Wiener path integrals
• Set-Indexed Itô Calculus Along Paths
• Path-dependent deep Galerkin method: a neural network approach to solve path-dependent partial differential equations
• First-order asymptotics of path-dependent derivatives in multiscale stochastic volatility environment
• Stochastic control and differential games with path-dependent influence of controls on dynamics and running cost
• Functional Itô calculus
• Krighedge: Gaussian process surrogates for delta hedging
• Self-interacting diffusions: long-time behaviour and exit-problem in the uniformly convex case
• A duality formula and a particle Gibbs sampler for continuous time Feynman-Kac measures on path spaces
• On the anticipative nonlinear filtering problem and its stability
• The functional Meyer–Tanaka formula
• A note on functional derivatives on continuous paths
• Short Communication: Pricing Path-Dependent Derivatives under Multiscale Stochastic Volatility Models: A Malliavin Representation
• A \(\mathbb{C}^{0, 1}\)-functional Itô's formula and its applications in mathematical finance
• A functional Itô's calculus approach to convex risk measures with jump diffusion
• Comparison of viscosity solutions of semilinear path-dependent PDEs
• Weak differentiability of Wiener functionals and occupation times
• Itô calculus without probability in idealized financial markets
• Computing deltas without derivatives

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