A Flexible Galerkin Scheme for Option Pricing in Lévy Models

DOI10.1137/16M1070438MaRDI QIDQ4553796zbMATH OpenFDO

Authors Maximilian Gaß, Kathrin Glau

Publication date 31 October 2018

Published in SIAM Journal on Financial Mathematics (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1603.08216

zbMATH Keywords

finite element methodGalerkin approachLévy processesoption pricingpartial integro differential equationspseudodifferential operatorssymbol

Mathematics Subject Classification ID

Initial value problems for PDEs with pseudodifferential operators (35S10) Processes with independent increments; Lévy processes (60G51) Finite element, Rayleigh-Ritz and Galerkin methods for initial value and initial-boundary value problems involving PDEs (65M60) Software, source code, etc. for problems pertaining to game theory, economics, and finance (91-04) Derivative securities (option pricing, hedging, etc.) (91G20) Numerical methods (including Monte Carlo methods) (91G60)

Abstract: One popular approach to option pricing in L'evy models is through solving the related partial integro differential equation (PIDE). For the numerical solution of such equations powerful Galerkin methods have been put forward e.g. by Hilber et al. (2013). As in practice large classes of models are maintained simultaneously, flexibility in the driving L'evy model is crucial for the implementation of these powerful tools. In this article we provide such a flexible finite element Galerkin method. To this end we exploit the Fourier representation of the infinitesimal generator, i.e. the related symbol, which is explicitly available for the most relevant L'evy models. Empirical studies for the Merton, NIG and CGMY model confirm the numerical feasibility of the method.

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Cited in

(10)

• Galerkin infinite element approximation for pricing barrier options and options with discontinuous payoff
• Probability-conservative simulation for \textit{Lévy} financial model by a mixed finite element method
• A finite elements approach for spread contract valuation via associated two-dimensional PIDE
• Feynman-Kac-formulas for option price valuation in Lévy models.
• Wavelet Galerkin schemes for multidimensional anisotropic integrodifferential operators
• Fourier space time-stepping for option pricing with Lévy models
• Variational solutions of the pricing PIDEs for European options in Lévy models
• Computable error estimates of a finite difference scheme for option pricing in exponential Lévy models
• Fast deterministic pricing of options on Lévy driven assets
• Solving partial integro-differential option pricing problems for a wide class of infinite activity Lévy processes

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