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

Pricing American Options under Stochastic Volatility and Jump Diffusion Dynamics

Contents:

Author Info

  • Carl Chiarella

    ()
    (School of Finance and Economics University of Technology, Sydney)

  • Andrew Ziogas

    (University of Technology, Sydney)

Abstract

This paper considers the problem of pricing American options when the dynamics of the underlying are driven both by stochastic volatility following a square root process as used by Heston (1993) and by a Poisson jump process as introduced by Merton (1976). The two-factor homogeneous integro-partial differential equation for the price and early exercise surface is cast into an in-homogeneous form accord- ing to the approach introduced by Jamshidian (1992). The Fourier transform is then applied to find the solution, which generalizes in an obvious way the structure of the solution to the corresponding European option pricing problem in the case of a call option and constant interest rates obtained by Scott (1997). The price is given by an integral equation dependent upon the early exercise surface, for which a correspond- ing integral equation is obtained. An algorithm is proposed for solving the integral equation system. The method is implemented, and the resulting prices and deltas are compared with the constant volatility model. The computational efficiency of the nu- merical integration scheme is also considered by comparing with benchmark solutions obtained by a finite difference method and the method of lines applied directly to the integro-partial differential equation

Download Info

To our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.

Bibliographic Info

Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2006 with number 44.

as in new window
Length:
Date of creation: 04 Jul 2006
Date of revision:
Handle: RePEc:sce:scecfa:44

Contact details of provider:
Email:
Web page: http://comp-econ.org/
More information through EDIRC

Related research

Keywords: optioin pricing; American options; jump-diffusion processes;

Find related papers by JEL classification:

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:sce:scecfa:44. 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: (Christopher F. Baum).

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.