Pricing Financial Derivatives by Gram-Charlier Expansions

Posted: 13 May 2013

See all articles by Yin-Hei Cheng

Yin-Hei Cheng

Scotiabank

Tony S. Wirjanto

University of Waterloo - School of Accounting and Finance; University of Waterloo, Department of Statistics & Actuarial Science

Date Written: May 12, 2013

Abstract

In this paper we provide several applications of Gram-Charlier expansions in financial derivative pricing. We first give an exposition on how to calculate swaption prices under a two-factor Cox-Ingersoll-Ross (CIR2) model. Then we apply this method to an extended version of the model (CIR2 ). We also develop a procedure to calculate European call options under Heston’s model of stochastic volatility by the Gram-Charlier expansions.

Keywords: Cumulants, moments, swaption prices, CIR2 Model, CIR Model, Brennan-Schwarz's Model, Heston's Model

JEL Classification: C00, C15, C63, G00, G12

Suggested Citation

Cheng, Yin-Hei and Wirjanto, Tony S., Pricing Financial Derivatives by Gram-Charlier Expansions (May 12, 2013). Available at SSRN: https://ssrn.com/abstract=2263954

Yin-Hei Cheng

Scotiabank ( email )

Tony S. Wirjanto (Contact Author)

University of Waterloo - School of Accounting and Finance ( email )

200 University Avenue West
Waterloo, Ontario N2L 3G1
Canada
519-888-4567 x35210 (Phone)

HOME PAGE: http://https://uwaterloo.ca/statistics-and-actuarial-science/people-profiles/tony-wirjanto

University of Waterloo, Department of Statistics & Actuarial Science ( email )

200 University Avenue West
Waterloo, Ontario N2L 3G1
Canada
519-888-4567 x35210 (Phone)
519-746-1875 (Fax)

HOME PAGE: http://math.uwaterloo.ca/statistics-and-actuarial-science/people-profiles/tony-wirjanto

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