A moment expansion approach to option pricing

DOI10.1080/14697680500117641MaRDI QIDQ5697340zbMATH OpenOpenAlexFDO

Authors Marco Airoldi

Publication date 17 October 2005

Published in Quantitative Finance (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/cond-mat/0401503

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Stochastic ordinary differential equations (aspects of stochastic analysis) (60H10) Applications of stochastic analysis (to PDEs, etc.) (60H30)

Abstract: In this paper we present a new methodology for option pricing. The main idea consists to represent a generic probability distribution function (PDF) via a perturbative expansion around a given, simpler, PDF (typically a gaussian function) by matching moments of increasing order. Because, as shown in literature, the pricing of path dependent European options can be often reduced to recursive (or nested) one-dimensional integral calculations, the above perturbative moment expansion (PME) leads very quickly to excellent numerical solutions. In this paper, we present the basic ideas of the method and the relative applications to a variety of contracts, mainly: asian, reverse cliquet and barrier options. A comparison with other numerical techniques is also presented.

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Cites work

• A Note on Average Rate Options with Discrete Sampling
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• PRICING OF AMERICAN PATH-DEPENDENT CONTINGENT CLAIMS
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Cited in

(11)

• A new method for generating approximation algorithms for financial mathematics applications
• The implied volatility smirk
• Option pricing where the underlying assets follow a Gram/Charlier density of arbitrary order
• Gram-Charlier methods, regime-switching and stochastic volatility in exponential Lévy models
• Pricing Asian options via compound gamma and orthogonal polynomials
• A moment-based analytic approximation of the risk-neutral density of American options
• A moments approach to option valuation models
• On a Heath-Jarrow-Morton approach for stock options
• A Monte Carlo multi-asset option pricing approximation for general stochastic processes
• Z-Transform and preconditioning techniques for option pricing
• Pricing financial claims contingent upon an underlying asset monitored at discrete times

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