The Exponent Expansion: An Effective Approximation Of Transition Probabilities Of Diffusion Processes And Pricing Kernels Of Financial Derivatives
AbstractA computational technique borrowed from the physical sciences is introduced to obtain accurate closed-form approximations for the transition probability of arbitrary diffusion processes. Within the path integral framework the same technique allows one to obtain remarkably good approximations of the pricing kernels of financial derivatives. Several examples are presented, and the application of these results to increase the efficiency of numerical approaches to derivative pricing is discussed.
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Bibliographic InfoArticle provided by World Scientific Publishing Co. Pte. Ltd. in its journal International Journal of Theoretical and Applied Finance.
Volume (Year): 09 (2006)
Issue (Month): 07 ()
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Web page: http://www.worldscinet.com/ijtaf/ijtaf.shtml
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- Pagliarani, Stefano & Pascucci, Andrea, 2011. "Analytical approximation of the transition density in a local volatility model," MPRA Paper 31107, University Library of Munich, Germany.
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