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A New Improvement Scheme for Approximation Methods of Probability Density Functions

Author

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  • Akihiko Takahashi

    (Faculty of Economics, University of Tokyo)

  • Yukihiro Tsuzuki

    (Graduate School of Economics, University of Tokyo)

Abstract

This paper develops a new scheme for improving an approximation method of a probability density function, which is inspired by the idea in best approximation in an inner product space . Moreover, we applies "Dykstra's cyclic projections algorithm" for its implementation. Numerical examples for application to an asymptotic expansion method in option pricing demonstrate the effectiveness of our scheme under Black-Scholes and SABR models.

Suggested Citation

  • Akihiko Takahashi & Yukihiro Tsuzuki, 2013. "A New Improvement Scheme for Approximation Methods of Probability Density Functions," CIRJE F-Series CIRJE-F-874, CIRJE, Faculty of Economics, University of Tokyo.
  • Handle: RePEc:tky:fseres:2013cf874
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    File URL: http://www.cirje.e.u-tokyo.ac.jp/research/dp/2013/2013cf874.pdf
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    References listed on IDEAS

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    1. Kyo Yamamoto & Seisho Sato & Akihiko Takahashi, 2008. "Probability Distribution and Option Pricing for Drawdown in a Stochastic Volatility Environment," CIRJE F-Series CIRJE-F-596, CIRJE, Faculty of Economics, University of Tokyo.
    2. Akihiko Takahashi & Kohta Takehara, 2010. "A Hybrid Asymptotic Expansion Scheme: an Application to Long-term Currency Options," CIRJE F-Series CIRJE-F-734, CIRJE, Faculty of Economics, University of Tokyo.
    3. Roger W. Lee, 2004. "The Moment Formula For Implied Volatility At Extreme Strikes," Mathematical Finance, Wiley Blackwell, vol. 14(3), pages 469-480.
    4. Akihiko Takahashi & Nakahiro Yoshida, 2005. "Monte Carlo Simulation with Asymptotic Method," CIRJE F-Series CIRJE-F-335, CIRJE, Faculty of Economics, University of Tokyo.
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    Cited by:

    1. Akihiko Takahashi, 2015. "Asymptotic Expansion Approach in Finance," CARF F-Series CARF-F-356, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo, revised Aug 2015.

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