Economics at your fingertips  

A Spanning Series Approach to Options

Steven L. Heston and Alberto G. Rossi

The Review of Asset Pricing Studies, 2017, vol. 7, issue 1, 2-42

Abstract: This paper shows that Edgeworth expansions for option valuation are equivalent to approximating option payoffs using Hermite polynomials. Consequently, the value of an option is the value of an infinite series of replicating polynomials. The resultant formulas express option values in terms of skewness, kurtosis, and higher moments. Unfortunately, the Hermite series diverges for fat-tailed models, so we provide alternative moment-based formulas. These formulas are a computationally efficient alternative to Fourier transform valuation and can value options even when the characteristic function is unknown. Applications include the first convergent solution for Hull and White’s stochastic volatility model.Received February 1, 2016; accepted June 27, 2016 by Editor Wayne Ferson.

JEL-codes: G12 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed

Downloads: (external link) (application/pdf)
Access to full text is restricted to subscribers.

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:

Access Statistics for this article

More articles in The Review of Asset Pricing Studies from Oxford University Press
Bibliographic data for series maintained by Oxford University Press ().

Page updated 2022-02-23
Handle: RePEc:oup:rapstu:v:7:y:2017:i:1:p:2-42.