IDEAS home Printed from https://ideas.repec.org/a/eee/dyncon/v24y2000i11-12p1721-1746.html
   My bibliography  Save this article

Approximating payoffs and pricing formulas

Author

Listed:
  • Darolles, Serge
  • Laurent, Jean-Paul

Abstract

We use the ideas developed by Madan and Milne (1994. Mathematical Finance 3, 223-245), Lacoste (1996. Mathematical Finance 6, 197-213) to explore the optimality of polynomial approximations in pricing securities. In particular, we look at the approximations for security payoffs as well as the associated pricing formula in a L2 framework. We apply these ideas to two examples, one where the state variable follows an Ornstein-Uhlenbeck process and one based on Brownian motion with reflecting barriers, to illustrate the strengths and weaknesses of the approach.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Darolles, Serge & Laurent, Jean-Paul, 2000. "Approximating payoffs and pricing formulas," Journal of Economic Dynamics and Control, Elsevier, vol. 24(11-12), pages 1721-1746, October.
    • Handle: RePEc:eee:dyncon:v:24:y:2000:i:11-12:p:1721-1746
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0165-1889(99)00092-5
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Bansal, Ravi & Viswanathan, S, 1993. " No Arbitrage and Arbitrage Pricing: A New Approach," Journal of Finance, American Finance Association, vol. 48(4), pages 1231-1262, September.
    2. Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, vol. 5(2), pages 177-188, November.
    3. repec:crs:wpaper:9736 is not listed on IDEAS
    4. Hansen, Lars Peter & Jagannathan, Ravi, 1997. " Assessing Specification Errors in Stochastic Discount Factor Models," Journal of Finance, American Finance Association, vol. 52(2), pages 557-590, June.
    5. Hansen, Lars Peter & Alexandre Scheinkman, Jose & Touzi, Nizar, 1998. "Spectral methods for identifying scalar diffusions," Journal of Econometrics, Elsevier, vol. 86(1), pages 1-32, June.
    6. Vasicek, Oldrich Alfonso, 1977. "Abstract: An Equilibrium Characterization of the Term Structure," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 12(04), pages 627-627, November.
    7. Hansen, Lars Peter & Scheinkman, Jose Alexandre, 1995. "Back to the Future: Generating Moment Implications for Continuous-Time Markov Processes," Econometrica, Econometric Society, vol. 63(4), pages 767-804, July.
    8. Dilip B. Madan & Frank Milne, 1994. "Contingent Claims Valued And Hedged By Pricing And Investing In A Basis," Mathematical Finance, Wiley Blackwell, vol. 4(3), pages 223-245.
    9. Jamshidian, Farshid, 1989. " An Exact Bond Option Formula," Journal of Finance, American Finance Association, vol. 44(1), pages 205-209, March.
    10. Chapman, David A, 1997. " Approximating the Asset Pricing Kernel," Journal of Finance, American Finance Association, vol. 52(4), pages 1383-1410, September.
    11. Bansal, Ravi & Hsieh, David A & Viswanathan, S, 1993. " A New Approach to International Arbitrage Pricing," Journal of Finance, American Finance Association, vol. 48(5), pages 1719-1747, December.
    12. Peter A. Abken & Dilip B. Madan & Buddhavarapu Sailesh Ramamurtie, 1996. "Estimation of risk-neutral and statistical densities by Hermite polynomial approximation: with an application to Eurodollar futures options," FRB Atlanta Working Paper 96-5, Federal Reserve Bank of Atlanta.
    13. Vincent Lacoste, 1996. "Wiener Chaos: A New Approach To Option Hedging," Mathematical Finance, Wiley Blackwell, vol. 6(2), pages 197-213.
    14. Amershi, Amin H, 1985. " A Complete Analysis of Full Pareto Efficiency in Financial Markets for Arbitrary Preferences," Journal of Finance, American Finance Association, vol. 40(4), pages 1235-1243, September.
    15. Florens, Jean-Pierre & Renault, Eric & Touzi, Nizar, 1998. "Testing For Embeddability By Stationary Reversible Continuous-Time Markov Processes," Econometric Theory, Cambridge University Press, vol. 14(06), pages 744-769, December.
    16. John, Kose, 1984. "Market Resolution and Valuation in Incomplete Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 19(01), pages 29-44, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Darolles, Serge & Florens, Jean-Pierre & Gourieroux, Christian, 2004. "Kernel-based nonlinear canonical analysis and time reversibility," Journal of Econometrics, Elsevier, vol. 119(2), pages 323-353, April.
    2. Antonio Cosma & Stefano Galluccio & Paola Pederzoli & O. Scaillet, "undated". "Valuing American Options Using Fast Recursive Projections," Swiss Finance Institute Research Paper Series 12-26, Swiss Finance Institute.
    3. Antonio Cosma & Stefano Galluccio & Paola Pederzoli & Olivier Scaillet, 2016. "Early exercise decision in American options with dividends, stochastic volatility and jumps," Papers 1612.03031, arXiv.org.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:dyncon:v:24:y:2000:i:11-12:p:1721-1746. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu). General contact details of provider: http://www.elsevier.com/locate/jedc .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.