Product Markovian quantization of a diffusion process with applications to finance

DOI10.1007/S11009-018-9652-1zbMATH Open1437.60047arXiv1511.01758OpenAlexW2885386668WikidataQ129364425 ScholiaQ129364425MaRDI QIDQ2176359FDOQ2176359

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)

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.

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

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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)

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Cited In (11)

• Conic quantization: stochastic volatility and market implied liquidity
• A fully quantization-based scheme for FBSDEs
• Optimal Quantization for Finance: From Random Vectors to Stochastic Processes
• Approximation of quantiles of components of diffusion 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
• Quantization meets Fourier: a new technology for pricing options
• Quantization goes polynomial
• Quantiles of the Euler Scheme for Diffusion Processes and Financial Applications
• Numerical methods for backward stochastic differential equations: a survey

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