Pricing Basket Options under Local Stochastic Volatility with Jumps
AbstractThis paper develops a new approximation formula for pricing basket options in a local-stochastic volatility model with jumps. In particular, the model admits local volatility functions and jump components in not only the underlying asset price processes, but also the volatility processes. To the best of our knowledge, the proposed formula is the first one which achieves an analytical approximation for the basket option prices under this type of the models. Moreover, some numerical experiments confirm the validity of the method.
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Bibliographic InfoPaper provided by Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo in its series CARF F-Series with number CARF-F-336.
Length: 41 pages
Date of creation: Dec 2013
Date of revision: May 2014
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-12-29 (All new papers)
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