Degenerate Kolmogorov equations in option pricing

Andrea Pascucci and Francesco Corielli ()

No 268, Computing in Economics and Finance 2006 from Society for Computational Economics

Abstract: 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.

Keywords: option pricing; degenerate parabolic equations; parametrix (search for similar items in EconPapers)
JEL-codes: C69 (search for similar items in EconPapers)
Date: 2006-07-04
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Persistent link: https://EconPapers.repec.org/RePEc:sce:scecfa:268

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