Numerical aspects of integration in semi-closed option pricing formulas for stochastic volatility jump diffusion models

DOI10.1080/00207160.2019.1614174zbMATH Open1480.91313arXiv2006.13181OpenAlexW3104272622WikidataQ127951380 ScholiaQ127951380MaRDI QIDQ5030643FDOQ5030643

Jan Pospíšil, Josef Daněk

Publication date: 17 February 2022

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

Abstract: In mathematical finance, a process of calibrating stochastic volatility (SV) option pricing models to real market data involves a numerical calculation of integrals that depend on several model parameters. This optimization task consists of large number of integral evaluations with high precision and low computational time requirements. However, for some model parameters, many numerical quadrature algorithms fail to meet these requirements. We can observe an enormous increase in function evaluations, serious precision problems and a significant increase of computational time. In this paper we numerically analyse these problems and show that they are especially caused by inaccurately evaluated integrands. We propose a fast regime switching algorithm that tells if it is sufficient to evaluate the integrand in standard double arithmetic or if a higher precision arithmetic has to be used. We compare and recommend numerical quadratures for typical SV models and different parameter values, especially for problematic cases.

Full work available at URL: https://arxiv.org/abs/2006.13181

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zbMATH Keywords

numerical integrationoption pricingadaptive quadraturestochastic volatility modelsvariable precision arithmetic

Mathematics Subject Classification ID

Numerical methods (including Monte Carlo methods) (91G60) Numerical integration (65D30) Numerical methods for integral transforms (65R10)

Cites Work

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Cited In (5)

• Calibration and simulation of Heston model
• Computational analysis of the behavior of stochastic volatility models with financial applications
• Numerical computation of Theta in a jump-diffusion model by integration by parts
• Solution of option pricing equations using orthogonal polynomial expansion.
• Calibration of the temporally varying volatility and interest rate functions

Uses Software

• Mulprec
• OPQ
• NDSolve
• Algorithm 957

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