Valuation of Financial Derivatives with Time-Dependent Parameters: Lie-Algebraic Approach

Quantitative Finance, Vol. 1, No. 1, pp. 73-78, 2001

6 Pages Posted: 7 May 2007

See all articles by Chi-Fai Lo

Chi-Fai Lo

The Chinese University of Hong Kong

Cho-Hoi Hui

Hong Kong Monetary Authority - Research Department

Abstract

Based upon the Wei-Norman theorem, this paper presents a Lie-algebraic technique for the pricing of financial derivatives with time-dependent parameters. By exploiting the dynamical symmetry of the pricing partial differential equations of the financial derivatives, the new method enables us to derive analytical closed-form pricing formulae very straightforwardly. We believe that this new approach will provide an efficient method for the valuation of financial derivatives.

Keywords: Lie algebra, option pricing, corporate bond pricing

JEL Classification: F31, G13

Suggested Citation

Lo, Chi-Fai and Hui, Cho-Hoi, Valuation of Financial Derivatives with Time-Dependent Parameters: Lie-Algebraic Approach. Quantitative Finance, Vol. 1, No. 1, pp. 73-78, 2001. Available at SSRN: https://ssrn.com/abstract=984135

Chi-Fai Lo (Contact Author)

The Chinese University of Hong Kong ( email )

Department of Physics
Shatin, N.T., Hong Kong
China

Cho-Hoi Hui

Hong Kong Monetary Authority - Research Department ( email )

Hong Kong
China

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