Degenerate Kolmogorov equations in option pricing
AbstractWe propose the use of a classical tool in PDE theory, the parametrix method, to build approximate solutions to generic parabolic models for pricing and hedging contingent claims. We obtain an expansion for the price of an option using as starting point the classical Black and Scholes formula. The approximation can be truncated to any number of terms and easily computable error measures are available.
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Bibliographic InfoPaper provided by Society for Computational Economics in its series Computing in Economics and Finance 2006 with number 268.
Date of creation: 04 Jul 2006
Date of revision:
option pricing; degenerate parabolic equations; parametrix;
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