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Pricing and Hedging Basket Options with Exact Moment Matching

Leccadito, Arturo, Paletta, Tommaso, Tunaru, Radu (2016) Pricing and Hedging Basket Options with Exact Moment Matching. Insurance: Mathematics and Economics, 69 . pp. 59-69. ISSN 0167-6687. (doi:10.1016/j.insmatheco.2016.03.013) (KAR id:55064)

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Theoretical models applied to option pricing should take into account the empirical characteristics of financial time series. In this paper, we show how to price basket options when the underlying asset prices follow a displaced log-normal process with jumps, capable of accommodating negative skewness and excess kurtosis. Our technique involves Hermite polynomial expansion that can match exactly the first m moments of the model-implied basket return. This method is shown to provide superior results for basket options not only with respect to pricing but also for hedging.

Item Type: Article
DOI/Identification number: 10.1016/j.insmatheco.2016.03.013
Uncontrolled keywords: Displaced log-normal jump-diffusion process, Hermite polynomials, moment matching, Quasi-analytical pricing, Basket options
Subjects: H Social Sciences > HA Statistics > HA33 Management Science
H Social Sciences > HG Finance
Divisions: Divisions > Division of Computing, Engineering and Mathematical Sciences > School of Mathematics, Statistics and Actuarial Science
Divisions > Kent Business School - Division > Department of Accounting and Finance
Depositing User: Radu Tunaru
Date Deposited: 20 Apr 2016 10:59 UTC
Last Modified: 09 Jan 2024 12:22 UTC
Resource URI: (The current URI for this page, for reference purposes)

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Tunaru, Radu.

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