Abstract
We present a numerical method for the frequent pricing of financial derivatives that depends on a large number of variables. The method is based on the construction of a polynomial basis to interpolate the value function of the problem by means of a hierarchical orthogonalization process that allows to reduce the number of degrees of freedom needed to have an accurate representation of the value function. In the paper we consider, as an example, a GARCH model that depends on eight parameters and show that a very large number of contracts for different maturities and asset and parameters values can be valued in a small computational time with the proposed procedure. In particular the method is applied to the problem of model calibration. The method is easily generalizable to be used with other models or problems.
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Research supported by Spanish MINECO under Grants MTM2013-42538-P and MTM2016-78995-P. Both authors acknowledge the helpful comments of Michèle Breton and Peter Christoffersen.
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de Frutos, J., Gatón, V. Chebyshev reduced basis function applied to option valuation. Comput Manag Sci 14, 465–491 (2017). https://doi.org/10.1007/s10287-017-0287-4
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DOI: https://doi.org/10.1007/s10287-017-0287-4