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Derivatives pricing using signature payoffs

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arxiv 1809.09466 v1 pith:PCZEPELH submitted 2018-09-25 q-fin.CP q-fin.MFq-fin.PR

classification q-fin.CPq-fin.MFq-fin.PR
keywords derivativespayoffsoptionssignaturepricecontinuouspricingaccuracy
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We introduce signature payoffs, a family of path-dependent derivatives that are given in terms of the signature of the price path of the underlying asset. We show that these derivatives are dense in the space of continuous payoffs, a result that is exploited to quickly price arbitrary continuous payoffs. This approach to pricing derivatives is then tested with European options, American options, Asian options, lookback options and variance swaps. As we show, signature payoffs can be used to price these derivatives with very high accuracy.

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