Evaluation of American option prices in a path integral framework using Fourier-Hermite series expansions

Publication Type:
Journal Article
Journal of Economic Dynamics and Control, 1999, 23 (9-10), pp. 1387 - 1424
Issue Date:
Filename Description Size
2006014878OK.pdf366.04 kB
Adobe PDF
Full metadata record
In this paper we review the path integral technique which has wide applications in statistical physics and relate it to the backward recursion technique which is widely used for the evaluation of derivative securities. We formulate the pricing of equity options, both European and American, using the path integral framework. Discretising in the time variable and using expansions in Fourier-Hermite series for the continuous representation of the underlying asset price, we show how these options can be evaluated in the path integral framework. For American options, the solution technique facilitates the accurate determination of the early exercise boundary as part of the solution. Additionally, the continuous representation of the state variable allows the relatively accurate and efficient evaluation of the option prices and the delta hedge ratio.
Please use this identifier to cite or link to this item: