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

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Abstract

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.

Item Type:	Article
Additional Information:	This is the preprint version of the published article, which is available at: https://doi.org/10.1016/j.chaos.2016.02.019
Keywords:	Multi-asset Option Pricing; Multivariate Risk Management; Edgeworth Expansion; Higher-order Moments;
Academic Unit:	Faculty of Science and Engineering > Research Institutes > Hamilton Institute Faculty of Social Sciences > Economics, Finance and Accounting
Item ID:	10203
Identification Number:	https://doi.org/10.1016/j.chaos.2016.02.019
Depositing User:	Juan Arismendi Zambrano
Date Deposited:	09 Nov 2018 17:46
Journal or Publication Title:	Chaos, Solitons & Fractals
Publisher:	Elsevier
Refereed:	Yes
URI:	https://www.sciencedirect.com
Use Licence:	This item is available under a Creative Commons Attribution Non Commercial Share Alike Licence (CC BY-NC-SA). Details of this licence are available here

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