MCFAM Seminar - Polynomial approximation of discounted moments

Speaker: Peter Spreij 

Abstract: We introduce an approximation strategy for the discounted moments of a stochastic process that can, for a large class of problems, approximate the true moments. These moments appear in pricing formulas of financial products such as bonds and credit derivatives. The approximation relies on high-order power series expansion of the infinitesimal generator, and draws parallels with the theory of polynomial processes. We demonstrate applications to bond pricing and credit derivatives. In the special cases that allow for an analytical solution the approximation error decreases to around 10 to 100 times machine precision for higher orders. When no analytical solution exists we tie out the approximation with existing numerical techniques. Joint work with Chenyu Zhao, Misha van Beek and Makhtar Ba.