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Option Pricing with Orthogonal Polynomial Expansions

Author

Listed:
  • Damien Ackerer

    (Swissquote Bank)

  • Damir Filipović

    (Ecole Polytechnique Fédérale de Lausanne and Swiss Finance Institute)

Abstract

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 affine case.

Suggested Citation

  • Damien Ackerer & Damir Filipović, 2017. "Option Pricing with Orthogonal Polynomial Expansions," Swiss Finance Institute Research Paper Series 17-41, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1741
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    File URL: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3076519
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    Citations

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    Cited by:

    1. Dias, Fabio S. & Peters, Gareth W., 2021. "Option pricing with polynomial chaos expansion stochastic bridge interpolators and signed path dependence," Applied Mathematics and Computation, Elsevier, vol. 411(C).
    2. Damien Ackerer & Damir Filipović & Sergio Pulido, 2018. "The Jacobi stochastic volatility model," Finance and Stochastics, Springer, vol. 22(3), pages 667-700, July.
    3. Andrea Barletta & Paolo Santucci de Magistris, 2018. "Analyzing the Risks Embedded in Option Prices with rndfittool," Risks, MDPI, vol. 6(2), pages 1-15, March.

    More about this item

    Keywords

    Option Pricing; Polynomial Diffusion Models; Stochastic Volatility; Orthogonal Polynomials;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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