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The computational hardness of pricing compound options

Author(s): Braverman, Mark; Pasricha, K

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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.
Publication Date: 12-Jan-2014
Electronic Publication Date: 2014
Citation: Braverman, M, Pasricha, K. (2014). The computational hardness of pricing compound options. 103 - 104. doi:10.1145/2554797.2554809
DOI: doi:10.1145/2554797.2554809
Pages: 103 - 104
Type of Material: Conference Article
Journal/Proceeding Title: Proceedings of the 2014 Conference on Innovations in Theoretical Computer Science2014
Version: Author's manuscript

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