High-Resolution Path-Integral Development of Financial Options

41 Pages Posted: 8 Oct 1999

See all articles by Lester Ingber

Lester Ingber

Physical Studies Institute LLC

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Abstract

The Black-Scholes theory of option pricing has been considered for many years as an important but very approximate zeroth-order description of actual market behavior. We generalize the functional form of the diffusion of these systems and also consider multi-factor models including stochastic volatility. Daily Eurodollar futures prices and implied volatilities are fit to determine exponents of functional behavior of diffusions using methods of global optimization, Adaptive Simulated Annealing (ASA), to generate tight fits across moving time windows of Eurodollar contracts. These short-time fitted distributions are then developed into long-time distributions using a robust non-Monte Carlo path-integral algorithm, PATHINT, to generate prices and derivatives commonly used by option traders.

JEL Classification: C32, C53, C61, C63, G13

Suggested Citation

Ingber, Lester, High-Resolution Path-Integral Development of Financial Options. Available at SSRN: https://ssrn.com/abstract=184428 or http://dx.doi.org/10.2139/ssrn.184428

Lester Ingber (Contact Author)

Physical Studies Institute LLC ( email )

Warrenton, OR 97146
United States

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