6533b871fe1ef96bd12d0ec9
RESEARCH PRODUCT
An Iterative Method for Pricing American Options Under Jump-Diffusion Models
Jari ToivanenJari ToivanenSanttu Salmisubject
Mathematical optimizationIterative methodValuation of optionsJump diffusionConvergence (routing)Finite difference methodFinite difference methods for option pricingLinear complementarity problemTerm (time)Mathematicsdescription
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 |
|---|---|---|---|---|
| 2011-01-01 | SSRN Electronic Journal |