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mj
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Posts: 3449
Joined: December 20th, 2001, 12:32 pm

power numeraire

February 26th, 2016, 1:48 am

I have done a little note on how to use powers of the stock price as numeraire. It actually has quite a few implications both theoretical and practical. I'd be interested in any comments.http://ssrn.com/abstract=2735944
 
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travisf
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Joined: May 12th, 2015, 8:51 pm

power numeraire

March 2nd, 2016, 3:54 pm

If you've looked at a pricing formula by Alex Lipton, he almost always uses square-root-of-spot as the numeraire. That symmetrizes between the original numeraire and taking the asset as numeraire. Of course he doesn't write it that way : he moves to PDE space and does changes of coordinates there. But if you translate back, that is the equivalent. Oh, and the payoff S^2 conditional on S>K is not far-fetched. In FX payoffs essentially like this trade as a self-quantoed vanilla, also called an "inverse" payoff.
Last edited by travisf on March 1st, 2016, 11:00 pm, edited 1 time in total.
 
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mj
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Posts: 3449
Joined: December 20th, 2001, 12:32 pm

power numeraire

March 2nd, 2016, 10:59 pm

Thanks. Do you have any specific references?
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