Computational Economics

, Volume 11, Issue 1, pp 129–163

The Path Integral Approach to Financial Modeling and Options Pricing

  • Vadim Linetsky

DOI: 10.1023/A:1008658226761

Cite this article as:
Linetsky, V. Computational Economics (1997) 11: 129. doi:10.1023/A:1008658226761


In this paper we review some applications of the path integral methodology of quantum mechanics to financial modeling and options pricing. A path integral is defined as a limit of the sequence of finite-dimensional integrals, in a much the same way as the Riemannian integral is defined as a limit of the sequence of finite sums. The risk-neutral valuation formula for path-dependent options contingent upon multiple underlying assets admits an elegant representation in terms of path integrals (Feynman–Kac formula). The path integral representation of transition probability density (Green's function) explicitly satisfies the diffusion PDE. Gaussian path integrals admit a closed-form solution given by the Van Vleck formula. Analytical approximations are obtained by means of the semiclassical (moments) expansion. Difficult path integrals are computed by numerical procedures, such as Monte Carlo simulation or deterministic discretization schemes. Several examples of path-dependent options are treated to illustrate the theory (weighted Asian options, floating barrier options, and barrier options with ladder-like barriers).

options Pricing financial Derivatives path Integrals stochastic Models. 

Copyright information

© Kluwer Academic Publishers 1997

Authors and Affiliations

  • Vadim Linetsky
    • 1
  1. 1.Department of Industrial and Operations EngineeringUniversity of MichiganAnn ArborU.S.A.

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