An analytical perturbative solution to the Merton–Garman model using symmetries. Issue 1 (29th September 2019) - Calmet, Xavier
Abstract: In this paper, we introduce an analytical perturbative solution to the Merton–Garman model. It is obtained by doing perturbation theory around the exact analytical solution of a model which possesses a two‐dimensional Galilean symmetry. We compare our perturbative solution of the Merton–Garman model to Monte Carlo simulations and find that our solutions perform surprisingly well for a wide range of parameters. We also show how to use symmetries to build option pricing models. Our results demonstrate that the concept of symmetry is important in mathematical finance.