Institutions | About Us | Help | Gaeilge
rian logo


Mark
Go Back
A Monte Carlo Multi-Asset Option Pricing Approximation for General Stochastic Processes
Arismendi Zambrano, Juan; De Genaro, Alan
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.
Keyword(s): Multi-asset Option Pricing; Multivariate Risk Management; Edgeworth Expansion; Higher-order Moments
Publication Date:
2016
Type: Journal article
Peer-Reviewed: Yes
Institution: Maynooth University
Citation(s): Arismendi Zambrano, Juan and De Genaro, Alan (2016) A Monte Carlo Multi-Asset Option Pricing Approximation for General Stochastic Processes. Chaos, Solitons & Fractals, 88. pp. 75-99. ISSN 0960-0779
Publisher(s): Elsevier
File Format(s): other
Related Link(s): http://eprints.maynoothuniversity.ie/10203/1/JAZ-Multi-asset-2016.pdf
First Indexed: 2018-11-10 06:00:28 Last Updated: 2018-11-10 06:00:28