Economy – Quantitative Finance – Computational Finance
Scientific paper
2011-09-04
Economy
Quantitative Finance
Computational Finance
Scientific paper
Using tools from spectral analysis, singular and regular perturbation theory, we develop a systematic method for analytically computing the approximate price of a derivative-asset. The payoff of the derivative-asset may be path-dependent. Additionally, the process underlying the derivative may exhibit killing (i.e. jump to default) as well as combined local/nonlocal stochastic volatility. The nonlocal component of volatility is multiscale, in the sense that it is driven by one fast-varying and one slow-varying factor. The flexibility of our modeling framework is contrasted by the simplicity of our method. We reduce the derivative pricing problem to that of solving a single eigenvalue equation. Once the eigenvalue equation is solved, the approximate price of a derivative can be calculated formulaically. To illustrate our method, we calculate the approximate price of three derivative-assets: a vanilla option on a defaultable stock, a path-dependent option on a non-defaultable stock, and a bond in a short-rate model.
No associations
LandOfFree
Pricing Derivatives on Multiscale Diffusions: an Eigenfunction Expansion Approach does not yet have a rating. At this time, there are no reviews or comments for this scientific paper.
If you have personal experience with Pricing Derivatives on Multiscale Diffusions: an Eigenfunction Expansion Approach, we encourage you to share that experience with our LandOfFree.com community. Your opinion is very important and Pricing Derivatives on Multiscale Diffusions: an Eigenfunction Expansion Approach will most certainly appreciate the feedback.
Profile ID: LFWR-SCP-O-109343