Option pricing with orthogonal polynomial expansions

We derive analytic series representations for European option prices in polynomial stochastic volatility models. This includes the Jacobi, Heston, Stein-Stein, and Hull-White models, for which we provide numerical case studies. We find that our polynomial option price series expansion performs as efficiently and accurately as the Fourier-transform-based method in the nested affine cases. We also derive and numerically validate series representations for option Greeks. We depict an extension of our approach to exotic options whose payoffs depend on a finite number of prices.


Published in:
Mathematical Finance
Year:
Jul 11 2019
Publisher:
Hoboken, WILEY
ISSN:
0960-1627
1467-9965
Keywords:
Laboratories:




 Record created 2019-07-24, last modified 2019-12-05


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