Using pseudo-parabolic and fractional equations for option pricing in jump diffusion models
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Publication:1930397
numerical methodGreen functionjump-diffusionfinite-difference schemepseudo-parabolic equationsgeneral stable tempered process
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)
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.
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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
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- Global and blow-up solutions of superlinear pseudoparabolic equations with unbounded coefficient
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