Representations for conditional expectations and applications to pricing and hedging of financial products in Lévy and jump-diffusion setting |
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Authors: | Catherine Daveloose Michèle Vanmaele |
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Institution: | Department of Applied Mathematics, Computer Science and Statistics, Ghent University, Gent, Belgium |
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Abstract: | In this article, we derive expressions for conditional expectations in terms of regular expectations without conditioning but involving some weights. For this purpose, we apply two approaches: the conditional density method and the Malliavin method. We use these expressions for the numerical estimation of the price of American options and their deltas in a Lévy and jump-diffusion setting. Several examples of applications to financial and energy markets are given including numerical examples. |
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Keywords: | Conditional expectation Monte Carlo methods conditional density method Malliavin calculus Pricing Lévy processes American option reduction of variance |
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