An eigenfunction expansion approach for the derivation of asymptotic expansions in financial valuation problems

Abstract

This study examines whether an alternative calculation approach exists for the asymptotic expansion of the probability density function of risky asset prices. We focus on the partial differential equation by using an eigenfunction expansion related to Hermite polynomials. We show that the expansion coefficients can be obtained by solving ordinary differential equations recursively and which order of Hermite polynomials appear in asymptotic expansion explicitly.