Peer-Reviewed Journal Details
Mandatory Fields
Arismendi, J;De Genaro, A
2016
July
Chaos, Solitons and Fractals
A Monte Carlo multi-asset option pricing approximation for general stochastic processes
Published
1 ()
Optional Fields
VALUATION DISTRIBUTIONS DENSITIES SKEWNESS ASSETS PRICES TESTS ORDER RISK
88
75
99
We derived a model-free analytical approximation of the price of a multi-asset option defined over an arbitrary multivariate process, applying a semi-parametric expansion of the unknown risk-neutral density with the moments. The analytical expansion termed as the Multivariate Generalised Edgeworth Expansion (MGEE) is an infinite series over the derivatives of an auxiliary continuous time density. The expansion could be used to enhance a Monte Carlo pricing methodology incorporating the information about moments of the risk-neutral distribution. The efficiency of the approximation is tested over a jump diffusion and a q-Gaussian diffusion. For the known density, we tested the multivariate lognormal (MVLN), even though arbitrary densities could be used. The MGEE relates two densities and isolates the effects of multivariate moments over the option prices. Results show that a calibrated approximation provides a good fit when the difference between the moments of the risk-neutral density and the auxiliary density are small relative to the density function of the former, and the uncalibrated approximation has immediate implications over risk management and hedging theory. The possibility to select the auxiliary density provides an advantage over classical Gram-Charlier A, B and C series approximations. (C) 2016 Elsevier Ltd. All rights reserved.
OXFORD
0960-0779
10.1016/j.chaos.2016.02.019
Grant Details