6533b85ffe1ef96bd12c1d1f
RESEARCH PRODUCT
An iterative method for pricing American options under jump-diffusion models
Santtu SalmiJari Toivanensubject
Numerical AnalysisNumerical linear algebraPartial differential equationIterative methodApplied MathematicsNumerical analysisJump diffusionta111computer.software_genreLinear complementarity problemComputational MathematicsComplementarity theoryValuation of optionsApplied mathematicscomputerMathematicsdescription
We propose an iterative method for pricing American options under jump-diffusion models. A finite difference discretization is performed on the partial integro-differential equation, and the American option pricing problem is formulated as a linear complementarity problem (LCP). Jump-diffusion models include an integral term, which causes the resulting system to be dense. We propose an iteration to solve the LCPs efficiently and prove its convergence. Numerical examples with Kou@?s and Merton@?s jump-diffusion models show that the resulting iteration converges rapidly.
| year | journal | country | edition | language |
|---|---|---|---|---|
| 2011-07-01 | Applied Numerical Mathematics |