Advanced Search
MyIDEAS: Login to save this paper or follow this series

Adaptive Continuous time Markov Chain Approximation Model to General Jump-Diusions

Contents:

Author Info

  • Cerrato, Mario
  • Lo, Chia Chun
  • Skindilias, Konstantinos
Registered author(s):

    Abstract

    We propose a non-equidistant Q rate matrix formula and an adaptive numerical algorithm for a continuous time Markov chain to approximate jump-diffusions with affine or non-affine functional specifications. Our approach also accommodates state-dependent jump intensity and jump distribution, a flexibility that is very hard to achieve with other numerical methods. The Kolmogorov-Smirnov test shows that the proposed Markov chain transition density converges to the one given by the likelihood expansion formula as in Ait-Sahalia (2008). We provide numerical examples for European stock option pricing in Black and Scholes (1973), Merton (1976) and Kou (2002).

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://repo.sire.ac.uk/handle/10943/286
    Download Restriction: no

    Bibliographic Info

    Paper provided by Scottish Institute for Research in Economics (SIRE) in its series SIRE Discussion Papers with number 2011-53.

    as in new window
    Length:
    Date of creation: 2011
    Date of revision:
    Handle: RePEc:edn:sirdps:286

    Contact details of provider:
    Postal: 31 Buccleuch Place, EH8 9JT, Edinburgh
    Phone: +44(0)1316508361
    Fax: +44(0)1316504514
    Email:
    Web page: http://www.sire.ac.uk
    More information through EDIRC

    Related research

    Keywords: Markov Chains; Di ffusion Approximation; Transition Density; Jump-Diffusion; Approximation; Option Pricing;

    This paper has been announced in the following NEP Reports:

    References

    No references listed on IDEAS
    You can help add them by filling out this form.

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:edn:sirdps:286. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Gina Reddie).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.