TITLE:
A Multinomial Theorem for Hermite Polynomials and Financial Applications
AUTHORS:
Francois Buet-Golfouse
KEYWORDS:
Hermite Polynomials, Multi-Factor Model, Hilbert Space, Mehler Formula
JOURNAL NAME:
Applied Mathematics,
Vol.6 No.6,
June
5,
2015
ABSTRACT: Different aspects of mathematical finance benefit from the use Hermite polynomials, and this is particularly the case where risk drivers have a Gaussian distribution. They support quick analytical methods which are computationally less cumbersome than a full-fledged Monte Carlo framework, both for pricing and risk management purposes. In this paper, we review key properties of Hermite polynomials before moving on to a multinomial expansion formula for Hermite polynomials, which is proved using basic methods and corrects a formulation that appeared before in the financial literature. We then use it to give a trivial proof of the Mehler formula. Finally, we apply it to no arbitrage pricing in a multi-factor model and determine the empirical futures price law of any linear combination of the underlying factors.