A semilinear equation for the American option in a general jump market

DOI10.4171/IFB/219MaRDI QIDQ846248zbMATH OpenOpenAlexFDO

Authors Olli Wallin, Kenneth H. Karlsen

Publication date 2 February 2010

Published in Interfaces and Free Boundaries (Search for Journal in Brave)

Full work available at URL http://www.ems-ph.org/

zbMATH Keywords

American optionsintegro-differential equationstrong comparison principleviscosity solutions

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Numerical methods (including Monte Carlo methods) (91G60) Financial applications of other theories (91G80)

Review text

The authors study the pricing of American put and call options in a market with jumps. They characterize the price as a solution of an integro-differential equation set on the whole domain which involves an additional reaction term that depends on the American option value in a nonlinear, nonlocal and discontinuous manner. To do this they give a proper definition of a viscosity solution of the equation and show that the characterization is well posed. Their main goal is to design and analyze ``easy to implement numerical algorithms for computing the value of an American option.

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Cited in

(9)

• A semilinear Black and Scholes partial differential equation for valuing American options
• Option pricing in mathematical financial market with jumps and related problems.
• A proof of the smoothness of the finite time horizon American put option for jump diffusions
• THE EVALUATION OF AMERICAN OPTION PRICES UNDER STOCHASTIC VOLATILITY AND JUMP-DIFFUSION DYNAMICS USING THE METHOD OF LINES
• A nonlinear partial differential equation for american options in the entire domain of the state variable
• Comparison and survey of finite difference methods for pricing American options under finite activity jump-diffusion models
• Existence and uniqueness of viscosity solutions of an integro-differential equation arising in option pricing
• A unique solution to a semilinear Black-Scholes partial differential equation for valuing multi-assets of American options
• Viscosity solutions and American option pricing in a stochastic volatility model of the Ornstein-Uhlenbeck type

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