A master equation approach to option pricing

Daniel Faller and Francesco Petruccione

Papers from arXiv.org

Abstract: A master equation approach to the numerical solution of option pricing models is developed. The basic idea of the approach is to consider the Black--Scholes equation as the macroscopic equation of an underlying mesoscopic stochastic option price variable. The dynamics of the latter is constructed and formulated in terms of a master equation. The numerical efficiency of the approach is demonstrated by means of stochastic simulation of the mesoscopic process for both European and American options.

Date: 2002-09
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:cond-mat/0209522

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