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Path dependent option pricing: the path integral partial averaging method (2002)
| Venue: | Journal of Computational Finance |
| Citations: | 10 - 0 self |
BibTeX
@ARTICLE{Matacz02pathdependent,
author = {Andrew Matacz and Rue Victor Hugo},
title = {Path dependent option pricing: the path integral partial averaging method},
journal = {Journal of Computational Finance},
year = {2002}
}
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Abstract
In this paper I develop a new computational method for pricing path dependent options. Using the path integral representation of the option price, I show that in general it is possible to perform analytically a partial averaging over the underlying risk-neutral diffusion process. This result greatly eases the computational burden placed on the subsequent numerical evaluation. For short-medium term options it leads to a general approximation formula that only requires the evaluation of a one dimensional integral. I illustrate the application of the method to Asian options and occupation time derivatives.
Keyphrases
path integral partial averaging method path dependent option pricing new computational method path dependent option partial averaging path integral representation occupation time derivative option price computational burden short-medium term option general approximation formula subsequent numerical evaluation underlying risk-neutral diffusion process
