A path integral way to option pricing

Guido Montagna, Oreste Nicrosini and Nicola Moreni

Physica A: Statistical Mechanics and its Applications, 2002, vol. 310, issue 3, 450-466

Abstract: An efficient computational algorithm to price financial derivatives is presented. It is based on a path integral formulation of the pricing problem. It is shown how the path integral approach can be worked out in order to obtain fast and accurate predictions for the value of a large class of options, including those with path-dependent and early exercise features. As examples, the application of the method to European and American options in the Black–Scholes model is illustrated. A particularly simple and fast semi-analytical approximation for the price of American options is derived. The results of the algorithm are compared with those obtained with the standard procedures known in the literature and found to be in good agreement.

Keywords: Econophysics; Stochastic processes; Path integral; Financial derivatives; Option pricing (search for similar items in EconPapers)
Date: 2002
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Citations: View citations in EconPapers (19)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:310:y:2002:i:3:p:450-466

DOI: 10.1016/S0378-4371(02)00796-3

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