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dc.contributor.authorBayer, Christian
dc.contributor.authorSiebenmorgen, Markus
dc.contributor.authorTempone, Raul
dc.date.accessioned2017-10-31T11:17:11Z
dc.date.available2017-10-31T11:17:11Z
dc.date.issued2017-07-22
dc.identifier.citationBayer C, Siebenmorgen M, Tempone R (2017) Smoothing the payoff for efficient computation of Basket option prices. Quantitative Finance: 1–15. Available: http://dx.doi.org/10.1080/14697688.2017.1308003.
dc.identifier.issn1469-7688
dc.identifier.issn1469-7696
dc.identifier.doi10.1080/14697688.2017.1308003
dc.identifier.urihttp://hdl.handle.net/10754/626067
dc.description.abstractWe consider the problem of pricing basket options in a multivariate Black–Scholes or Variance-Gamma model. From a numerical point of view, pricing such options corresponds to moderate and high-dimensional numerical integration problems with non-smooth integrands. Due to this lack of regularity, higher order numerical integration techniques may not be directly available, requiring the use of methods like Monte Carlo specifically designed to work for non-regular problems. We propose to use the inherent smoothing property of the density of the underlying in the above models to mollify the payoff function by means of an exact conditional expectation. The resulting conditional expectation is unbiased and yields a smooth integrand, which is amenable to the efficient use of adaptive sparse-grid cubature. Numerical examples indicate that the high-order method may perform orders of magnitude faster than Monte Carlo or Quasi Monte Carlo methods in dimensions up to 35.
dc.description.sponsorshipKing Abdullah University of Science and Technology[CEMSE]
dc.publisherInforma UK Limited
dc.relation.urlhttp://www.tandfonline.com/doi/abs/10.1080/14697688.2017.1308003
dc.rightsThis is an Accepted Manuscript of an article published by Taylor & Francis in Quantitative Finance on 20 Jul 2017, available online: http://wwww.tandfonline.com/10.1080/14697688.2017.1308003.
dc.subjectComputational Finance
dc.subjectEuropean option pricing
dc.subjectMonte Carlo and Quasi Monte Carlo methods
dc.subjectMultivariate approximation and integration
dc.subjectSparse grids
dc.subjectStochastic Collocation methods
dc.titleSmoothing the payoff for efficient computation of Basket option prices
dc.typeArticle
dc.contributor.departmentComputer, Electrical and Mathematical Sciences and Engineering (CEMSE) Division
dc.identifier.journalQuantitative Finance
dc.eprint.versionPost-print
dc.contributor.institutionWeierstrass Institute, Mohrenstrasse 39, 10117Berlin, Germany.
dc.contributor.institutionInstitute for Numerical Simulation, University of Bonn, Wegelerstr. 6, 53115Bonn, Germany.
kaust.personTempone, Raul


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