Optimal Damping with Hierarchical Adaptive Quadrature for Efficient Fourier Pricing of Multi-Asset Options in Lévy Models
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| Format: | Preprint |
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2022
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| _version_ | 1866911757090422784 |
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| author | Samet, Michael Bayer, Christian Hammouda, Chiheb Ben Papapantoleon, Antonis Tempone, Raúl |
| author_facet | Samet, Michael Bayer, Christian Hammouda, Chiheb Ben Papapantoleon, Antonis Tempone, Raúl |
| contents | Efficiently pricing multi-asset options is a challenging problem in quantitative finance. When the characteristic function is available, Fourier-based methods are competitive compared to alternative techniques because the integrand in the frequency space often has a higher regularity than that in the physical space. However, when designing a numerical quadrature method for most Fourier pricing approaches, two key aspects affecting the numerical complexity should be carefully considered: (i) the choice of damping parameters that ensure integrability and control the regularity class of the integrand and (ii) the effective treatment of high dimensionality. We propose an efficient numerical method for pricing European multi-asset options based on two complementary ideas to address these challenges. First, we smooth the Fourier integrand via an optimized choice of the damping parameters based on a proposed optimization rule. Second, we employ sparsification and dimension-adaptivity techniques to accelerate the convergence of the quadrature in high dimensions. The extensive numerical study on basket and rainbow options under the multivariate geometric Brownian motion and some Lévy models demonstrates the advantages of adaptivity and the damping rule on the numerical complexity of quadrature methods. Moreover, for the tested two-asset examples, the proposed approach outperforms the COS method in terms of computational time. Finally, we show significant speed-up compared to the Monte Carlo method for up to six dimensions. |
| format | Preprint |
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arxiv_https___arxiv_org_abs_2203_08196 |
| institution | arXiv |
| publishDate | 2022 |
| record_format | arxiv |
| spellingShingle | Optimal Damping with Hierarchical Adaptive Quadrature for Efficient Fourier Pricing of Multi-Asset Options in Lévy Models Samet, Michael Bayer, Christian Hammouda, Chiheb Ben Papapantoleon, Antonis Tempone, Raúl Computational Finance Numerical Analysis Pricing of Securities Efficiently pricing multi-asset options is a challenging problem in quantitative finance. When the characteristic function is available, Fourier-based methods are competitive compared to alternative techniques because the integrand in the frequency space often has a higher regularity than that in the physical space. However, when designing a numerical quadrature method for most Fourier pricing approaches, two key aspects affecting the numerical complexity should be carefully considered: (i) the choice of damping parameters that ensure integrability and control the regularity class of the integrand and (ii) the effective treatment of high dimensionality. We propose an efficient numerical method for pricing European multi-asset options based on two complementary ideas to address these challenges. First, we smooth the Fourier integrand via an optimized choice of the damping parameters based on a proposed optimization rule. Second, we employ sparsification and dimension-adaptivity techniques to accelerate the convergence of the quadrature in high dimensions. The extensive numerical study on basket and rainbow options under the multivariate geometric Brownian motion and some Lévy models demonstrates the advantages of adaptivity and the damping rule on the numerical complexity of quadrature methods. Moreover, for the tested two-asset examples, the proposed approach outperforms the COS method in terms of computational time. Finally, we show significant speed-up compared to the Monte Carlo method for up to six dimensions. |
| title | Optimal Damping with Hierarchical Adaptive Quadrature for Efficient Fourier Pricing of Multi-Asset Options in Lévy Models |
| topic | Computational Finance Numerical Analysis Pricing of Securities |
| url | https://arxiv.org/abs/2203.08196 |