Path dependent option pricing: the path integral partial averaging method

Andrew Matacz
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Andrew Matacz: Science & Finance, Capital Fund Management

No 500034, Science & Finance (CFM) working paper archive from Science & Finance, Capital Fund Management

Abstract: In this paper I develop a new computational method for pricing path dependent options. Using the path integral representation of the option price, I show that in general it is possible to perform analytically a partial averaging over the underlying risk-neutral diffusion process. This result greatly eases the computational burden placed on the subsequent numerical evaluation. For short-medium term options it leads to a general approximation formula that only requires the evaluation of a one dimensional integral. I illustrate the application of the method to Asian options and occupation time derivatives.

JEL-codes: G10 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn, nep-cmp and nep-fin
Date: 2000-05
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