Meshfree Approximation for Multi-Asset Options

Emmanuel Hanert and Aanand Venkatramanan ()
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Emmanuel Hanert: Départment des sciences du milieu et de l'aménagement du territoire, Université catholique de Louvain
Aanand Venkatramanan: ICMA Centre, University of Reading

ICMA Centre Discussion Papers in Finance from Henley Business School, University of Reading

Abstract: We price multi-asset options by solving their price partial differential equations using a meshfree approach with radial basis functions under jump-diffusion and geometric Brownian motion frameworks. In the geometric Brownian motion framework, we propose an effective technique that breaks the multi-dimensional problem to multiple 3D problems. We solve the price PDEs or PIDEs with an implicit meshfree scheme using thin-plate radial basis functions. Meshfree approach is very accurate, has high order of convergence and is easily scalable and adaptable to higher dimensions and different payoff profiles. We also obtain closed form approximations for the option Greeks. We test the model on American crack spread options traded on NYMEX.

Keywords: Multi-asset options; radial basis function; meshfree approximation; collocation; multidimensional Lévy process; basket options; PIDE; PDE (search for similar items in EconPapers)
JEL-codes: C02 C30 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2008-07, Revised 2009-06
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Citations: View citations in EconPapers (1)

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