English, Article edition: A "COHERENT STATE TRANSFORM" APPROACH TO DERIVATIVE PRICING LUDOVICO PERISSINOTTO; CLAUDIO TEBALDI

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Physical Description
  • article
Language
  • English

Edition details

Title
  • A "COHERENT STATE TRANSFORM" APPROACH TO DERIVATIVE PRICING
Author
  • LUDOVICO PERISSINOTTO
  • CLAUDIO TEBALDI
Physical Description
  • article
Notes
  • We propose an extension of the transform approach to option pricing introduced in Duffie, Pan and Singleton (Econometrica 68(6) (2000) 1343â1376) and in Carr and Madan (Journal of Computational Finance 2(4) (1999) 61â73). We term this extension the "coherent state transform" approach, it applies when the Markov generator of the factor process can be decomposed as a linear combination of generators of a Lie symmetry group. Then the family of group invariant coherent states determine the transform to price derivatives. We exemplify this procedure deriving a coherent state transform for affine jump-diffusion processes with positive state space. It improves the traditional FFT because inversion of the latter requires integration over an unbounded domain, while inversion of the coherent state transform requires integration over unit ball. We explicitly perform the pricing exercise for some contracts like the plain vanilla options on (credit) risky bonds and on the spread option.
  • Coherent states, affine jump diffusion, Lie groups, Lie algebras
  • RePEc:wsi:ijtafx:v:12:y:2009:i:02:p:125-151
Language
  • English
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