Optimal Damping with Hierarchical Adaptive Quadrature for Efficient Fourier Pricing of Multi-Asset Options in L\'evy Models

Michael Samet, Christian Bayer, Chiheb Ben Hammouda, Antonis Papapantoleon and Ra\'ul Tempone

Papers from arXiv.org

Abstract: Efficiently pricing multi-asset options is a challenging problem in quantitative finance. When the characteristic function is available, Fourier-based methods are competitive compared to alternative techniques because the integrand in the frequency space often has a higher regularity than that in the physical space. However, when designing a numerical quadrature method for most Fourier pricing approaches, two key aspects affecting the numerical complexity should be carefully considered: (i) the choice of damping parameters that ensure integrability and control the regularity class of the integrand and (ii) the effective treatment of high dimensionality. We propose an efficient numerical method for pricing European multi-asset options based on two complementary ideas to address these challenges. First, we smooth the Fourier integrand via an optimized choice of the damping parameters based on a proposed optimization rule. Second, we employ sparsification and dimension-adaptivity techniques to accelerate the convergence of the quadrature in high dimensions. The extensive numerical study on basket and rainbow options under the multivariate geometric Brownian motion and some L\'evy models demonstrates the advantages of adaptivity and the damping rule on the numerical complexity of quadrature methods. Moreover, for the tested two-asset examples, the proposed approach outperforms the COS method in terms of computational time. Finally, we show significant speed-up compared to the Monte Carlo method for up to six dimensions.

Date: 2022-03, Revised 2023-10
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://arxiv.org/pdf/2203.08196 Latest version (application/pdf)

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: https://EconPapers.repec.org/RePEc:arx:papers:2203.08196

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().