A time multidomain spectral method for valuing affine stochastic volatility and jump diffusion models (Q2204418)

A time-spectral domain decomposition method is developed that accommodates differential equations arising from financial models of affine type. The affine structure of the financial models is used to avoid solving the multi-dimensional partial integro-differential equation (PIDE) but rather to solve a system of Riccati equations. The method is based on the Tau-matrix approach using a differentiation matrix method on a time interval divided into disjoint domains. The Riccati equations are solved in the frequency domain using an operational matrix based on Chebyshev polynomials. In this way, the original problem is transformed into an iterative system of algebraic equations that is easier to solve. Three numerical examples are implemented and solutions are compared to numerical solutions from Chebfun [\textit{R. B. Platte} and \textit{L. N. Trefethen}, Math. Ind. 15, 69--87 (2010; Zbl 1220.65100)]. The numerical results show that the method maintains its spectral convergence even for large time-space intervals. The method can be applied to other affine models with jumps.