Low-rank tensor approximation for Chebyshev interpolation in parametric option pricing

Kathrin Glau, Daniel Kressner and Francesco Statti

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Abstract: Treating high dimensionality is one of the main challenges in the development of computational methods for solving problems arising in finance, where tasks such as pricing, calibration, and risk assessment need to be performed accurately and in real-time. Among the growing literature addressing this problem, Gass et al. [14] propose a complexity reduction technique for parametric option pricing based on Chebyshev interpolation. As the number of parameters increases, however, this method is affected by the curse of dimensionality. In this article, we extend this approach to treat high-dimensional problems: Additionally exploiting low-rank structures allows us to consider parameter spaces of high dimensions. The core of our method is to express the tensorized interpolation in tensor train (TT) format and to develop an efficient way, based on tensor completion, to approximate the interpolation coefficients. We apply the new method to two model problems: American option pricing in the Heston model and European basket option pricing in the multi-dimensional Black-Scholes model. In these examples we treat parameter spaces of dimensions up to 25. The numerical results confirm the low-rank structure of these problems and the effectiveness of our method compared to advanced techniques.

Date: 2019-02
New Economics Papers: this item is included in nep-cmp
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Citations: View citations in EconPapers (3)

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