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Pricing and hedging basket options with exact moment matching


  • Leccadito, Arturo
  • Paletta, Tommaso
  • Tunaru, Radu


Theoretical models applied to option pricing should take into account the empirical characteristics of financial time series. In this paper, we show how to price basket options when the underlying asset prices follow a displaced log-normal process with jumps, capable of accommodating negative skewness and excess kurtosis. Our technique involves Hermite polynomial expansion that can match exactly the first m moments of the model-implied basket return. This method is shown to provide superior results for basket options not only with respect to pricing but also for hedging.

Suggested Citation

  • Leccadito, Arturo & Paletta, Tommaso & Tunaru, Radu, 2016. "Pricing and hedging basket options with exact moment matching," Insurance: Mathematics and Economics, Elsevier, vol. 69(C), pages 59-69.
  • Handle: RePEc:eee:insuma:v:69:y:2016:i:c:p:59-69
    DOI: 10.1016/j.insmatheco.2016.03.013

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    References listed on IDEAS

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    More about this item


    Displaced log-normal jump–diffusion process; Hermite polynomials; Moment matching; Quasi-analytical pricing; Basket options;

    JEL classification:

    • C18 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Methodolical Issues: General
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G19 - Financial Economics - - General Financial Markets - - - Other


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