Nonparametric pricing and hedging of exotic derivatives

In the spirit of Arrow-Debreu, we introduce a family of financial derivatives that act as primitive securities in that exotic derivatives can be approximated by their linear combinations. We call these financial derivatives signature payoffs. We show that signature payoffs can be used to nonparametr...

Full description

Saved in:
Bibliographic Details
Main Authors Lyons, Terry, Nejad, Sina, Arribas, Imanol Perez
Format Journal Article
LanguageEnglish
Published 02.05.2019
Subjects
Quantitative Finance - Mathematical Finance
Online AccessGet full text

Cover

More Information
Summary:In the spirit of Arrow-Debreu, we introduce a family of financial derivatives that act as primitive securities in that exotic derivatives can be approximated by their linear combinations. We call these financial derivatives signature payoffs. We show that signature payoffs can be used to nonparametrically price and hedge exotic derivatives in the scenario where one has access to price data for other exotic payoffs. The methodology leads to a computationally tractable and accurate algorithm for pricing and hedging using market prices of a basket of exotic derivatives that has been tested on real and simulated market prices, obtaining good results.
DOI:10.48550/arxiv.1905.00711