A master equation approach to option pricing
Statistical Mechanics
2009-11-07 v1 Pricing of Securities
Abstract
A master equation approach to the numerical solution of option pricing models is developed. The basic idea of the approach is to consider the Black--Scholes equation as the macroscopic equation of an underlying mesoscopic stochastic option price variable. The dynamics of the latter is constructed and formulated in terms of a master equation. The numerical efficiency of the approach is demonstrated by means of stochastic simulation of the mesoscopic process for both European and American options.
Cite
@article{arxiv.cond-mat/0209522,
title = {A master equation approach to option pricing},
author = {Daniel Faller and Francesco Petruccione},
journal= {arXiv preprint arXiv:cond-mat/0209522},
year = {2009}
}
Comments
19 pages, 6 figures, to be published in Physica A