Option pricing using the IMEX-AVF method with high jump intensity
convergence analysisEuropean and American optionsjump-diffusion modelslinear complementarity problemsoperator splitting
Integro-partial differential equations (35R09) Jump processes on discrete state spaces (60J74) Numerical methods for partial differential equations, initial value and time-dependent initial-boundary value problems (65M99) Derivative securities (option pricing, hedging, etc.) (91G20) Numerical methods (including Monte Carlo methods) (91G60)
In this work, a two time-level second-order accurate implicit-explicit (IMEX) method is formulated using the concept of average vector field (AVF) integration for the efficient valuation of options within jump-diffusion models based on PIDEs. European options are priced by solving the resultant partial integro-differential equation, while American options are priced by solving the corresponding linear complementarity problem (LCP). The operator splitting (OS) method is used to solve the American constraints. The present method implicitly treats the differential and non-local integral operators, which results in better accuracy and quadratic convergence rate. To assess the accuracy of the proposed IMEX-AVF method, convergence analysis is theoretically established using the discrete \(l^2\)-norm. Numerical experiments for European and American options under jump-diffusion models are given in Section 6.
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- The pricing of options and corporate liabilities
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