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Basket Options Valuation for a Local Volatility Jump-Diffusion Model with the Asymptotic Expansion Method

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  • Guoping Xu
  • Harry Zheng
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    Abstract

    In this paper we discuss the basket options valuation for a jump-diffusion model. The underlying asset prices follow some correlated local volatility diffusion processes with systematic jumps. We derive a forward partial integral differential equation (PIDE) for general stochastic processes and use the asymptotic expansion method to approximate the conditional expectation of the stochastic variance associated with the basket value process. The numerical tests show that the suggested method is fast and accurate in comparison with the Monte Carlo and other methods in most cases.

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    File URL: http://arxiv.org/pdf/1003.1848
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    Bibliographic Info

    Paper provided by arXiv.org in its series Papers with number 1003.1848.

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    Date of creation: Mar 2010
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    Handle: RePEc:arx:papers:1003.1848

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    Web page: http://arxiv.org/

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    Cited by:
    1. Kenichiro Shiraya & Akihiko Takahashi, 2013. "Pricing Basket Options under Local Stochastic Volatility with Jumps," CARF F-Series, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo CARF-F-336, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo, revised May 2014.
    2. Stefano, Pagliarani & Pascucci, Andrea & Candia, Riga, 2011. "Expansion formulae for local Lévy models," MPRA Paper 34571, University Library of Munich, Germany.

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