Online citations, reference lists, and bibliographies.
← Back to Search

NUMERICAL SCHEMES FOR OPTION PRICING IN REGIME-SWITCHING JUMP DIFFUSION MODELS

IONUT FLORESCU, RUIHUA LIU, MARIA CRISTINA MARIANI, GRANVILLE SEWELL

Save to my Library
Download PDF
Analyze on Scholarcy Visualize in Litmaps
Share
Reduce the time it takes to create your bibliography by a factor of 10 by using the world’s favourite reference manager
Time to take this seriously.
Get Citationsy
In this paper, we present algorithms to solve a complex system of partial integro-differential equations (PIDE's) of parabolic type. The system is motivated by applications in finance where the solution of the system gives the price of European options in a regime-switching jump diffusion model. The new algorithms are based on theoretical analysis in Florescu et al. (2012) where the proof of convergence of the algorithms is carried out. The problems are also solved using a more traditional approach, where the integral terms (but not the derivative terms) are treated explicitly. Another contribution of this work details a novel type of jump distribution. Empirical evidence suggests that this type of distribution may be more appropriate to model jumps as it makes them more clearly distinguishable from the signal variability.