Path Dependent Option Pricing: The Path Integral Partial Averaging Method

22 Pages Posted: 23 Nov 2000

Date Written: November 1999

Abstract

In this paper I develop a new computational method for pricing path dependent options. Using the path integral representation of the option price, I show that in general it is possible to perform analytically a partial averaging over the underlying risk-neutral diffusion process. This result greatly eases the computational burden placed on the subsequent numerical evaluation. For short-medium term options it leads to a general approximation formula that only requires the evaluation of a one dimensional integral. I illustrate the application of the method to Asian options and occupation time derivatives.

Keywords: derivatives, option, path dependent, path integral

JEL Classification: G13, C63

Suggested Citation

Matacz, Andrew, Path Dependent Option Pricing: The Path Integral Partial Averaging Method (November 1999). AFA 2001 New Orleans Meetings. Available at SSRN: https://ssrn.com/abstract=249570 or http://dx.doi.org/10.2139/ssrn.249570

Andrew Matacz (Contact Author)

Capital Fund Management ( email )

23 rue de l'Université
Paris, 75007
France
+33 1 41 27 91 08 (Phone)
+33 1 47 39 04 47 (Fax)

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