Physics and Derivatives: Effective-Potential Path-Integral Approximations of Arrow-Debreu Densities
| Autor: | Capriotti, Luca, Vaia, Ruggero |
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| Rok vydání: | 2019 |
| Předmět: | |
| Zdroj: | Journal of Derivatives 28, 8-25 (2020) |
| Druh dokumentu: | Working Paper |
| DOI: | 10.3905/jod.2020.1.107 |
| Popis: | We show how effective-potential path-integrals methods, stemming on a simple and nice idea originally due to Feynman and successfully employed in Physics for a variety of quantum thermodynamics applications, can be used to develop an accurate and easy-to-compute semi-analytical approximation of transition probabilities and Arrow-Debreu densities for arbitrary diffusions. We illustrate the accuracy of the method by presenting results for the Black-Karasinski and the GARCH linear models, for which the proposed approximation provides remarkably accurate results, even in regimes of high volatility, and for multi-year time horizons. The accuracy and the computational efficiency of the proposed approximation makes it a viable alternative to fully numerical schemes for a variety of derivatives pricing applications. Comment: 12 pages, 4 figures |
| Databáze: | arXiv |
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