The computational hardness of pricing compound options

Mark Braverman, Kanika Pasricha

Research output: Chapter in Book/Report/Conference proceedingConference contribution

3 Scopus citations

Abstract

It is generally assumed that you can make a financial asset out of any underlying event or combination thereof, and then sell a security. We show that while this is theoretically true from the financial engineering perspective, compound securities might be intractable to price. Even given no information asymmetries, or adversarial sellers, it might be computationally intractable to put a value on these, and the associated computational complexity might afford an advantage to the party with more compute power. We prove that the problem of pricing an option on a single security with unbounded compounding is PSPACE hard, even when the behavior of the underlying security is computationally tractable. We also show that in the oracle model, even when compounding is limited to at most k layers, the complexity of pricing securities grows exponentially in k.

Original languageEnglish (US)
Title of host publicationITCS 2014 - Proceedings of the 2014 Conference on Innovations in Theoretical Computer Science
PublisherAssociation for Computing Machinery
Pages103-104
Number of pages2
ISBN (Print)9781450322430
DOIs
StatePublished - Jan 1 2014
Event2014 5th Conference on Innovations in Theoretical Computer Science, ITCS 2014 - Princeton, NJ, United States
Duration: Jan 12 2014Jan 14 2014

Publication series

NameITCS 2014 - Proceedings of the 2014 Conference on Innovations in Theoretical Computer Science

Other

Other2014 5th Conference on Innovations in Theoretical Computer Science, ITCS 2014
CountryUnited States
CityPrinceton, NJ
Period1/12/141/14/14

All Science Journal Classification (ASJC) codes

  • Computational Theory and Mathematics

Keywords

  • Computational complexity
  • Computational finance
  • Financial securities
  • Pricing

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  • Cite this

    Braverman, M., & Pasricha, K. (2014). The computational hardness of pricing compound options. In ITCS 2014 - Proceedings of the 2014 Conference on Innovations in Theoretical Computer Science (pp. 103-104). (ITCS 2014 - Proceedings of the 2014 Conference on Innovations in Theoretical Computer Science). Association for Computing Machinery. https://doi.org/10.1145/2554797.2554809