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Technical Note 21

The document discusses Hermite polynomials and Gaussian quadrature, which are used to approximate integrals of functions over the normal distribution. Hermite polynomials have roots that are used in Gaussian quadrature to calculate weights and abscissas that yield an exact approximation if the integrated function is a polynomial up to the same order. Numerical methods are available to determine the roots of Hermite polynomials needed for the Gaussian quadrature approximation.

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44 views2 pages

Technical Note 21

The document discusses Hermite polynomials and Gaussian quadrature, which are used to approximate integrals of functions over the normal distribution. Hermite polynomials have roots that are used in Gaussian quadrature to calculate weights and abscissas that yield an exact approximation if the integrated function is a polynomial up to the same order. Numerical methods are available to determine the roots of Hermite polynomials needed for the Gaussian quadrature approximation.

Uploaded by

aamna_shaikh01
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© © All Rights Reserved
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Technical Note No.

21*
Options, Futures, and Other Derivatives
John Hull

Hermite Polynomials and Their Use for Integration

As explained in the chapter on credit derivatives in the text, the Gaussian copula
model requires functions to be integrated over a normal distribution between −∞ and
+∞. Gaussian quadrature approximates the integral as
Z ∞ M
1 2 X
√ e−F /2 g(F )dF ≈ wk g(Fk ) (1)
−∞ 2π k=1

The approximation gets better as M increases. It has the property that it is exact when
g(F ) is a polynomial of order M .
The determination the wk and Fk involves Hermite polynomials. If you want to avoid
getting into the details of this, values of wk and Fk for different values of M can be
downloaded from a spread sheet on the author’s web site.
The first few Hermite polynomials are

H0 (x) = 1
H1 (x) = 2x

H2 (x) = 4x2 − 2

H3 (x) = 8x3 − 12x

H4 (x) = 16x4 − 48x2 + 12


A recurrence relationship for calculating higher order polynomials is

Hn+1 (x) = 2xHn (x) − 2nHn−1 (x)

and an equation for the derivative with respect to x is

Hn0 (x) = 2nHn−1 (x)

Define xk (1 ≤ k ≤ n) as the n roots of Hn (x) (that is, the n values of x for which
Hn (x) = 0) and
√
∗ 2n−1 n! π
wk = 2
n [Hn−1 (xk )]2
A key result is
Z ∞ n
X 2
f (x)dx ≈ wk∗ exk f (xk ) (2)
−∞ k=1

* Copyright
c John Hull. All Rights Reserved. This note may be reproduced for use in
conjunction with Options, Futures, and Other Derivatives by John C. Hull.

1
√
Setting x = F/ 2 and
1 2 √
f (x) = √ e−x g( 2x)
π
equation (2) gives
Z ∞ n
1 2 X1
√ e−F /2 g(F )dF ≈ wk∗ g(Fk )
−∞ 2π π
k=1

or alternatively
Z ∞ n
1 2 X
√ e−F /2 g(F )dy ≈ wk g(Fk )
−∞ 2π k=1

where
w∗ √
wk = √k Fk = 2xk
π
This is the result in equation (1), with n = M .
This leaves the problem of calculating the n roots of a Hermite polynomial. A program
for doing this is ‘gauher’ in “Numerical Recipes for C: The Art of Scientific Computing”
by Press, Flanery, Teukolsky, and Vetterling, Cambridge University Press.

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