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A note on stochastic polynomial chaos expansions for uncertain volatility and Asian option pricing. (English) Zbl 1488.91160

Summary: This paper concerns accurate and efficient polynomial chaos expansions (PCEs) for Asian option pricing with uncertain volatilities. While arbitrary distributions of the volatility parameter are applied for estimating real-world option prices, arbitrary polynomial chaos (aPC) are incorporated for approximating raw data of the historical volatility distributions. Rigorous analysis is carried out to ensure the numerical stability of the compact aPC Crank-Nicolson finite difference method accomplished. Numerical results acquired are compared with solutions via standard Monte Carlo schemes (MCSs) and generalized polynomial chaos (gPC) with different random volatilities. Stock data from Asian financial industry are used. It is evident that the novel schemes derived are highly accurate and efficient for evaluating means and variances of uncertain volatility and stochastic Asian option pricing.

MSC:

91G60 Numerical methods (including Monte Carlo methods)
65C99 Probabilistic methods, stochastic differential equations
91G20 Derivative securities (option pricing, hedging, etc.)
41A10 Approximation by polynomials
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