Journal of Computational Finance
ISSN:
1460-1559 (print)
1755-2850 (online)
Editor-in-chief: Christoph Reisinger
A chaos expansion approach for the pricing of contingent claims
Hideharu Funahashi and Masaaki Kijima
Abstract
ABSTRACT
In this paper, we propose an approximation method based on the Wiener-Ito chaos expansion for the pricing of European-style contingent claims. Our method is applicable to the general class of continuous Markov processes. The resulting approximation formula requires at most three-dimensional numerical integration. It will be shown through numerical examples that the accuracy of our approximation remains quite high, even for the case of high volatility and long maturity.
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