Non-parametric Pricing and Hedging of Exotic Derivatives

Terry Lyons, Sina Nejad and Imanol Perez Arribas

Applied Mathematical Finance, 2020, vol. 27, issue 6, 457-494

Abstract: In the spirit of Arrow–Debreu, we introduce a family of financial derivatives that act as primitive securities in that exotic derivatives can be approximated by their linear combinations. We call these financial derivatives signature payoffs. We show that signature payoffs can be used to non-parametrically price and hedge exotic derivatives in the scenario where one has access to price data for other exotic payoffs. The methodology leads to a computationally tractable and accurate algorithm for pricing and hedging using market prices of a basket of exotic derivatives that has been tested on real and simulated market prices, obtaining good results.

Date: 2020
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Citations: View citations in EconPapers (9)

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DOI: 10.1080/1350486X.2021.1891555

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