Journal of Computational Finance

A chaos expansion approach for the pricing of contingent claims

Hideharu Funahashi and Masaaki Kijima


In this paper, we propose an approximation method based on the Wiener-Ito chaos expansion for the pricing of European-style contingent claims. Our method is applicable to the general class of continuous Markov processes. The resulting approximation formula requires at most three-dimensional numerical integration. It will be shown through numerical examples that the accuracy of our approximation remains quite high, even for the case of high volatility and long maturity.

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