Using pseudo-parabolic and fractional equations for option pricing in jump diffusion models

DOI10.1007/S10614-011-9269-8zbMATH Open1254.91747arXiv1002.1995OpenAlexW2161628554MaRDI QIDQ1930397FDOQ1930397

Authors: Andrey Itkin, Peter Carr 

Publication date: 11 January 2013

Published in: Computational Economics (Search for Journal in Brave)

Abstract: In mathematical finance a popular approach for pricing options under some Levy model is to consider underlying that follows a Poisson jump diffusion process. As it is well known this results in a partial integro-differential equation (PIDE) that usually does not allow an analytical solution while numerical solution brings some problems. In this paper we elaborate a new approach on how to transform the PIDE to some class of so-called pseudo-parabolic equations which are known in mathematics but are relatively new for mathematical finance. As an example we discuss several jump-diffusion models which Levy measure allows such a transformation.

Full work available at URL: https://arxiv.org/abs/1002.1995

Recommendations

• A Finite Difference Scheme for Option Pricing in Jump Diffusion and Exponential Lévy Models
• Numerical approximation of option pricing model under jump diffusion using the Laplace transformation method
• Pricing derivatives under Lévy models. Modern finite-difference and pseudo-differential operators approach
• A class of option pricing models based on jump-diffusion processes
• Option pricing under some Lévy-like stochastic processes

zbMATH Keywords

numerical methodGreen functionjump-diffusionfinite-difference schemepseudo-parabolic equationsgeneral stable tempered process

Mathematics Subject Classification ID

Numerical methods (including Monte Carlo methods) (91G60) Green's functions for ordinary differential equations (34B27) Finite difference and finite volume methods for ordinary differential equations (65L12) Stability and convergence of numerical methods for ordinary differential equations (65L20) Numerical methods for discrete and fast Fourier transforms (65T50) Partial differential equations of mixed type and mixed-type systems of partial differential equations (35M99)

Cites Work

• Financial Modelling with Jump Processes
• The fractional calculus. Theory and applications of differentiation and integration to arbitrary order
• Finite difference approximations for fractional advection-dispersion flow equations
• A second-order accurate numerical approximation for the fractional diffusion equation
• Finite difference approximations for two-sided space-fractional partial differential equations
• Jump-diffusion processes: volatility smile fitting and numerical methods for option pricing
• A Finite Difference Scheme for Option Pricing in Jump Diffusion and Exponential Lévy Models
• A comparison of numerical solutions of fractional diffusion models in finance
• Pricing options on realized variance
• Stability and convergence of Crank-Nicolson method for fractional advection dispersion equation
• Analysis of operator splitting for advection-diffusion-reaction problems from air pollution modelling
• A Semi-Lagrangian Approach for American Asian Options under Jump Diffusion
• A penalty method for American options with jump diffusion processes
• Robust numerical methods for contingent claims under jump diffusion processes
• A computational scheme for option under jump diffusion processes
• Numerical Analysis of American Option Pricing in a Jump-Diffusion Model
• Numerical methods for Lévy processes
• Unconditional stability of second-order ADI schemes applied to multi-dimensional diffusion equations with mixed derivative terms
• The logarithm of the derivative operator and higher spin algebras of \(W_{\infty{}}\) type
• Jump without tears: a new splitting technology for barrier options
• Classical and weak solutions for one-dimensional pseudo-parabolic equations with typical boundary data

Cited In (15)

• A fast preconditioned iterative method for two-dimensional options pricing under fractional differential models
• Pricing illiquid options with \(N+1\) liquid proxies using mixed dynamic-static hedging
• Pricing variance swaps on time-changed Markov processes
• Modelling stochastic skew of FX options using SLV models with stochastic spot/vol correlation and correlated jumps
• Asymptotics for exponential Lévy processes and their volatility smile: survey and new results
• Circulant preconditioning technique for barrier options pricing under fractional diffusion models
• An implicit-explicit preconditioned direct method for pricing options under regime-switching tempered fractional partial differential models
• A fast preconditioned penalty method for American options pricing under regime-switching tempered fractional diffusion models
• A Flexible Galerkin Scheme for Option Pricing in Lévy Models
• Efficient solution of structural default models with correlated jumps and mutual obligations
• Tempered fractional diffusion equations for pricing multi-asset options under CGMYe process
• HIGH ORDER SPLITTING METHODS FOR FORWARD PDEs AND PIDEs
• RBF-FD solution for a financial partial-integro differential equation utilizing the generalized multiquadric function
• A radial basis function -- Hermite finite difference approach to tackle cash-or-nothing and asset-or-nothing options
• Global and blow-up solutions of superlinear pseudoparabolic equations with unbounded coefficient

This page was built for publication: Using pseudo-parabolic and fractional equations for option pricing in jump diffusion models

Report a bug (only for logged in users!)Click here to report a bug for this page (MaRDI item Q1930397)