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Degenerate Kolmogorov equations in option pricing


  • Andrea Pascucci

    () (Mathematics Università di Bologna)

  • Francesco Corielli

    (Università di Bologna)


We 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.

Suggested Citation

  • Andrea Pascucci & Francesco Corielli, 2006. "Degenerate Kolmogorov equations in option pricing," Computing in Economics and Finance 2006 268, Society for Computational Economics.
  • Handle: RePEc:sce:scecfa:268

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    More about this item


    option pricing; degenerate parabolic equations; parametrix;

    JEL classification:

    • C69 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Other


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