A moment expansion approach to option pricing

DOI10.1080/14697680500117641zbMATH Open1118.91316arXivcond-mat/0401503OpenAlexW2005412424MaRDI QIDQ5697340FDOQ5697340

Authors: Marco Airoldi 

Publication date: 17 October 2005

Published in: Quantitative Finance (Search for Journal in Brave)

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.

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

Recommendations

• AN ACCURATE VALUATION OF ASIAN OPTIONS USING MOMENTS
• Moment matching approximation of Asian basket option prices
• Asian option pricing with orthogonal polynomials
• Pricing exotic options in a path integral approach
• A novel pricing method for European options based on Fourier-cosine series expansions

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)

Cites Work

• The pricing of options and corporate liabilities
• A continuity correction for discrete barrier options
• PRICING OF AMERICAN PATH-DEPENDENT CONTINGENT CLAIMS
• Monte Carlo methods for security pricing
• Analysis of quadrature methods for pricing discrete barrier options
• Connecting discrete and continuous path-dependent options
• Asymptotic Approximations to Distributions
• Gram-Charlier densities.
• CONTINGENT CLAIMS VALUED AND HEDGED BY PRICING AND INVESTING IN A BASIS
• Pricing Discrete Barrier and Hindsight Options with the Tridiagonal Probability Algorithm
• Random walk duality and the valuation of discrete lookback options
• A Note on Average Rate Options with Discrete Sampling

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

This page was built for publication: A moment expansion approach to option pricing

Report a bug (only for logged in users!)Click here to report a bug for this page (MaRDI item Q5697340)