Operator splitting schemes for the two-asset Merton jump-diffusion model

DOI10.1016/J.CAM.2019.06.025zbMATH Open1459.65138arXiv1901.03839OpenAlexW2963353039WikidataQ127657741 ScholiaQ127657741MaRDI QIDQ2223797FDOQ2223797

Authors: Lynn Boen, Karel J. in 't Hout 

Publication date: 3 February 2021

Published in: Journal of Computational and Applied Mathematics (Search for Journal in Brave)

Abstract: This paper deals with the numerical solution of the two-dimensional time-dependent Merton partial integro-differential equation (PIDE) for the values of rainbow options under the two-asset Merton jump-diffusion model. Key features of this well-known equation are a two-dimensional nonlocal integral part and a mixed spatial derivative term. For its efficient and stable numerical solution, we study seven recent and novel operator splitting schemes of the implicit-explicit (IMEX) and the alternating direction implicit (ADI) kind. Here the integral part is always conveniently treated in an explicit fashion. The convergence behaviour and the relative performance of the seven schemes are investigated in ample numerical experiments for both European put-on-the-min and put-on-the-average options.

Full work available at URL: https://arxiv.org/abs/1901.03839

Recommendations

• Operator splitting schemes for American options under the two-asset Merton jump-diffusion model
• An operator splitting method for multi-asset options with the Feynman-Kac formula
• Operator splitting methods for pricing American options under stochastic volatility
• A splitting strategy for the calibration of jump-diffusion models
• A high order weak approximation for jump-diffusions using Malliavin calculus and operator splitting
• Splitting scheme for backward doubly stochastic differential equations
• A quick operator splitting method for option pricing
• An operator splitting method for pricing the ELS option
• scientific article; zbMATH DE number 5346999
• Application of operator splitting methods in finance

zbMATH Keywords

partial integro-differential equationsoperator splitting schemestwo-asset Merton jump-diffusion model

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Numerical methods (including Monte Carlo methods) (91G60) PDEs in connection with game theory, economics, social and behavioral sciences (35Q91) Integro-partial differential equations (45K05) Integro-partial differential equations (35R09) Finite difference methods for initial value and initial-boundary value problems involving PDEs (65M06) Numerical methods for discrete and fast Fourier transforms (65T50) Method of lines for boundary value problems involving PDEs (65N40) Jump processes on discrete state spaces (60J74)

Cites Work

• BENCHOP -- SLV: the BENCHmarking project in option pricing -- stochastic and local volatility problems
• The pricing of options and corporate liabilities
• A closed-form solution for options with stochastic volatility with applications to bond and currency options
• A novel pricing method for European options based on Fourier-cosine series expansions
• Option pricing when underlying stock returns are discontinuous
• On the stability of implicit-explicit linear multistep methods
• Title not available (Why is that?)
• 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
• Numerical solution of two asset jump diffusion models for option valuation
• Finite element solution of diffusion problems with irregular data
• On the contractivity of implicit-explicit linear multistep methods
• Pricing Options in Jump-Diffusion Models: An Extrapolation Approach
• A finite volume approach for contingent claims valuation
• Numerical valuation of options with jumps in the underlying
• A Second-order Finite Difference Method for Option Pricing Under Jump-diffusion Models
• Paul Wilmott on quantitative finance. 3 Vols. With CD-ROM
• Robust numerical methods for contingent claims under jump diffusion processes
• Implicit-explicit numerical schemes for jump-diffusion processes
• An IMEX-scheme for pricing options under stochastic volatility models with jumps
• Unconditional stability of second-order ADI schemes applied to multi-dimensional diffusion equations with mixed derivative terms
• Stability of the modified Craig-Sneyd scheme for two-dimensional convection-diffusion equations with mixed derivative term
• ADI schemes for valuing European options under the Bates model
• Jump without tears: a new splitting technology for barrier options
• IMEX schemes for pricing options under jump-diffusion models
• Convergence of the modified Craig-Sneyd scheme for two-dimensional convection-diffusion equations with mixed derivative term
• Pricing derivatives under Lévy models. Modern finite-difference and pseudo-differential operators approach
• Application of operator splitting methods in finance
• On multistep stabilizing correction splitting methods with applications to the Heston model
• AMF-type W-methods for parabolic problems with mixed derivatives
• European rainbow option values under the two-asset Merton jump-diffusion model

Cited In (9)

• High-performance computation of pricing two-asset American options under the Merton jump-diffusion model on a GPU
• A posteriori error control and adaptivity for the IMEX BDF2 method for PIDEs with application to options pricing models
• European rainbow option values under the two-asset Merton jump-diffusion model
• An operator splitting method for multi-asset options with the Feynman-Kac formula
• Operator splitting schemes for American options under the two-asset Merton jump-diffusion model
• Splitting and matrix exponential approach for jump-diffusion models with Inverse Normal Gaussian, Hyperbolic and Meixner jumps
• An efficient variable step-size method for options pricing under jump-diffusion models with nonsmooth payoff function
• Valuation of two-factor options under the Merton jump-diffusion model using orthogonal spline wavelets.
• Adaptive option pricing based on a posteriori error estimates for fully discrete finite difference methods

Uses Software

• BENCHOP

This page was built for publication: Operator splitting schemes for the two-asset Merton jump-diffusion model

Report a bug (only for logged in users!)Click here to report a bug for this page (MaRDI item Q2223797)