Option pricing under the jump diffusion and multifactor stochastic processes

DOI10.1155/2019/9754679MaRDI QIDQ2631912zbMATH OpenOpenAlexWikidataFDO

Authors Shican Liu, Yanli Zhou, Yonghong Wu, Xiangyu Ge

Publication date 16 May 2019

Published in Journal of Function Spaces (Search for Journal in Brave)

Copyright license Creative Commons Attribution 4.0 International

Full work available at URL https://doi.org/10.1155/2019/9754679

zbMATH Keywords

Heston model extensionhigh dimensional PIDEjump diffusionoption pricing

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Numerical methods (including Monte Carlo methods) (91G60)

Review text

Summary: In financial markets, there exists long-observed feature of the implied volatility surface such as volatility smile and skew. Stochastic volatility models are commonly used to model this financial phenomenon more accurately compared with the conventional Black-Scholes pricing models. However, one factor stochastic volatility model is not good enough to capture the term structure phenomenon of volatility smirk. In our paper, we extend the Heston model to be a hybrid option pricing model driven by multiscale stochastic volatility and jump diffusion process. In our model the correlation effects have been taken into consideration. For the reason that the combination of multiscale volatility processes and jump diffusion process results in a high dimensional differential equation (PIDE), an efficient finite element method is proposed and the integral term arising from the jump term is absorbed to simplify the problem. The numerical results show an efficient explanation for volatility smirks when we incorporate jumps into both the stock process and the volatility process.

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Cited in

(21)

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