SOLVING THE ASIAN OPTION PDE USING LIE SYMMETRY METHODS

Nicolette C. Caister, John G. O'Hara () and Keshlan S. Govinder
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Nicolette C. Caister: Department of Statistics and Actuarial Science, University of KwaZulu-Natal, Private Bag X54001, Durban 4001, South Africa
John G. O'Hara: Centre for Computational Finance and Economic Agents, University of Essex, Colchester CO4 3SQ, United Kingdom
Keshlan S. Govinder: Astrophysics and Cosmology Research Unit, School of Mathematical Sciences, University of KwaZulu-Natal, Private Bag X54001, Durban 4001, South Africa

International Journal of Theoretical and Applied Finance (IJTAF), 2010, vol. 13, issue 08, 1265-1277

Abstract: Asian options incorporate the average stock price in the terminal payoff. Examination of the Asian option partial differential equation (PDE) has resulted in many equations of reduced order that in general can be mapped into each other, although this is not always shown. In the literature these reductions and mappings are typically acquired via inspection or ad hoc methods. In this paper, we evaluate the classical Lie point symmetries of the Asian option PDE. We subsequently use these symmetries with Lie's systematic and algorithmic methods to show that one can obtain the same aforementioned results. In fact we find a familiar analytical solution in terms of a Laplace transform. Thus, when coupled with their methodic virtues, the Lie techniques reduce the amount of intuition usually required when working with differential equations in finance.

Keywords: Asian option PDE; Lie symmetries; reductions; mappings; analytical solution; inverse Laplace transform (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (4)

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DOI: 10.1142/S0219024910006194

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