A Polynomial Scheme of Asymptotic Expansion for Backward SDEs and Option pricing

Masaaki Fujii

Papers from arXiv.org

Abstract: A new asymptotic expansion scheme for backward SDEs (BSDEs) is proposed.The perturbation parameter is introduced just to scale the forward stochastic variables within a BSDE. In contrast to the standard small-diffusion asymptotic expansion method, the dynamics of variables given by the forward SDEs is treated exactly. Although it requires a special form of the quadratic covariation terms of the continuous part, it allows rather generic drift as well as jump components to exist. The resultant approximation is given by a polynomial function in terms of the unperturbed forward variables whose coefficients are uniquely specified by the solution of the recursive system of linear ODEs. Applications to a jump-extended Heston and lambda-SABR models for European contingent claims, as well as the utility-optimization problem in the presence of a terminal liability are discussed.

Date: 2014-05, Revised 2014-12
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://arxiv.org/pdf/1405.0378 Latest version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1405.0378

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().