SciCADE 2013
International Conference on Scientific Computation and Differential Equations
September 16-20, 2013, Valladolid (Spain)

Invited Talk

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Robust pricing of European options with wavelets

L. Ortiz-Gracia and C. Oosterlee

We present a novel method for pricing European options based on the wavelet approximation (WA) method and the characteristic function. We focus on the discounted expected payoff pricing formula, and compute it by means of wavelets. We approximate the density function associated to the underlying asset price process by a finite combination of B-splines, and recover the coefficients of the approximation from the characteristic function. Two variants for wavelet approximation will be presented, where the second variant adaptively determines the range of integration. The compact support of a B-splines basis enables us to price options in a robust way, even in cases where Fourier-based pricing methods may show weaknesses. The method appears to be particularly robust for pricing long-maturity options and fat tailed distributions.

Organized by         Universidad de Valladolid     IMUVA