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A hybrid Markov chain-tree valuation framework for stochastic volatility jump diffusion models

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  • Duy Nguyen

    (Department of Mathematics, Marist College, 3399 North Road, Poughkeepsie NY 12601, United States)

Abstract

We develop a unified hybrid valuation framework for computing option values under stochastic volatility (SV) models with a jump component. The proposed method originates from the tree method and regime switching approximation. Conditions on the choices of key parameters for the tree design are provided to guarantee the positivity of branch probabilities. We also prove the weak convergence of the proposed method to the true stochastic models. Numerical results are provided to illustrate the effectiveness of the proposed method.

Suggested Citation

  • Duy Nguyen, 2018. "A hybrid Markov chain-tree valuation framework for stochastic volatility jump diffusion models," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 5(04), pages 1-30, December.
    • Handle: RePEc:wsi:ijfexx:v:05:y:2018:i:04:n:s2424786318500391
    DOI: 10.1142/S2424786318500391
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