A moment expansion approach to option pricing
Author:
Marco Airoldi a
| Affiliation: | a Mediobanca, Milan, Italy |
DOI:
10.1080/14697680500117641
Publication Frequency:
8 issues per year
Number of References: 47
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Abstract
In this paper we present a new methodology for option pricing. The main idea consists of representing a generic probability distribution function (PDF) by an expansion around a given, simpler, PDF (typically a Gaussian function) by matching moments of increasing order. Because, as shown in the literature, the pricing of path-dependent European options can often be reduced to recursive (or nested) one-dimensional integral calculations, the moment expansion (ME) approach leads very quickly to excellent numerical solutions. In this paper, we present the basic ideas of the method and the relative applications to a variety of contracts, mainly: Asian, reverse cliquet and barrier options. A comparison with other numerical techniques is also presented.
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