LSV models with stochastic interest rates and correlated jumps

DOI10.1080/00207160.2016.1188923zbMATH Open1367.91193arXiv1511.01460OpenAlexW1948900764MaRDI QIDQ4976326FDOQ4976326

Authors: Andrey Itkin 

Publication date: 28 July 2017

Published in: International Journal of Computer Mathematics (Search for Journal in Brave)

Abstract: Pricing and hedging exotic options using local stochastic volatility models drew a serious attention within the last decade, and nowadays became almost a standard approach to this problem. In this paper we show how this framework could be extended by adding to the model stochastic interest rates and correlated jumps in all three components. We also propose a new fully implicit modification of the popular Hundsdorfer and Verwer and Modified Craig-Sneyd finite-difference schemes which provides second order approximation in space and time, is unconditionally stable and preserves positivity of the solution, while still has a linear complexity in the number of grid nodes.

Full work available at URL: https://arxiv.org/abs/1511.01460

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zbMATH Keywords

stochastic interest ratesmatrix exponentialsplittingPIDEcorrelated Lévy processesLSV model

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Numerical methods (including Monte Carlo methods) (91G60) Integro-partial differential equations (35R09) Finite difference and finite volume methods for ordinary differential equations (65L12) Interest rates, asset pricing, etc. (stochastic models) (91G30)

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Cited In (6)

• Modelling stochastic skew of FX options using SLV models with stochastic spot/vol correlation and correlated jumps
• Pricing of vanilla and first-generation exotic options in the local stochastic volatility framework: survey and new results
• Title not available (Why is that?)
• Pricing average and spread options under local-stochastic volatility jump-diffusion models
• Can negative interest rates really affect option pricing? Empirical evidence from an explicitly solvable stochastic volatility model
• Pricing autocallables under local-stochastic volatility

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