COMPUTATIONAL METHOD FOR PROBABILITY DISTRIBUTION ON RECURSIVE RELATIONSHIPS IN FINANCIAL APPLICATIONS

In quantitative finance, it is often necessary to analyze the distribution of the sum of specific functions of observed values at discrete points of an underlying process. Examples include the probability density function, the hedging error, the Asian option, and statistical hypothesis testing. We p...

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Bibliographic Details
Published in:Probability in the engineering and informational sciences 2020-04, Vol.34 (2), p.258-278
Main Authors: Park, Jong Jun, Lee, Kyungsub
Format: Article
Language:English
Subjects:
Hypothesis testing
Probability density functions
Recursive methods
Statistical analysis
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Summary:In quantitative finance, it is often necessary to analyze the distribution of the sum of specific functions of observed values at discrete points of an underlying process. Examples include the probability density function, the hedging error, the Asian option, and statistical hypothesis testing. We propose a method to calculate such a distribution, utilizing a recursive method, and examine it using various examples. The results of the numerical experiment show that our proposed method has high accuracy.
ISSN:0269-9648
1469-8951
DOI:10.1017/S0269964818000517