Option Pricing with Lie Symmetry Analysis and Similarity Reduction Method
AbstractWith some transformations, we convert the problem of option pricing under state-dependent volatility into an initial value problem of the Fokker-Planck equation with a certain potential. By using the Lie symmetry analysis and similarity reduction method, we are able to reduce the dimensions of the partial differential equation and find some of its particular solutions of the equation. A few case studies demonstrate that our new method can be used to produce analytical option pricing formulas for certain volatility functions.
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Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 1311.4074.
Date of creation: Nov 2013
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Web page: http://arxiv.org/
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-11-22 (All new papers)
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