Correlators of polynomial processes

DOI10.1137/21M141556XMaRDI QIDQ5013833zbMATH OpenOpenAlexFDO

Authors Fred Espen Benth, Silvia Lavagnini

Publication date 2 December 2021

Published in SIAM Journal on Financial Mathematics (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1906.11320

zbMATH Keywords

correlatorseliminating and duplicating matricesgenerator matrixGreeksHankel matrixpath-dependent optionpolynomial jump-diffusion processstochastic volatility

Mathematics Subject Classification ID

Diffusion processes (60J60) Jump processes on discrete state spaces (60J74) Derivative securities (option pricing, hedging, etc.) (91G20)

Abstract: In the setting of polynomial jump-diffusion dynamics, we provide an explicit formula for computing correlators, namely, cross-moments of the process at different time points along its path. The formula appears as a linear combination of exponentials of the generator matrix, extending the well-known moment formula for polynomial processes. The developed framework can, for example, be applied in financial pricing, such as for path-dependent options and in a stochastic volatility models context. In applications to options, having closed and compact formulations is attractive for sensitivity analysis and risk management, since Greeks can be derived explicitly.

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Cited in

(5)

• Sharp polynomial estimates for the decay of correlations
• Pricing Asian options with correlators
• Matrix calculations for moments of Markov processes
• Abstract polynomial processes
• Parameter estimation for partially observed affine and polynomial processes

Describes a project that uses

Uses Software

• MATLAB expm
• CaterpillarSSA

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