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Pricing Exotic Option Under Jump-Diffusion Models by the Quadrature Method

Author

Listed:
  • Jin-Yu Zhang

    (Nanjing Audit University)

  • Wen-Bo Wu

    (Renmin University of China)

  • Yong Li

    (Renmin University of China)

  • Zhu-Sheng Lou

    (Renmin University of China)

Abstract

This paper extends the quadrature method to price exotic options under jump-diffusion models. We compute the transition density of jump-extended models using convolution integrals. Furthermore, a simpler and more efficient lattice grid is introduced to implement the recursion more directly in matrix form. It can be shown that a lot of running time can be saved. At last, we apply the developed approach to the different jump-extended models to demonstrate its universality and provide a detailed comparison for the discrete path-dependent options to demonstrate its advantages in terms of speed and accuracy.

Suggested Citation

  • Jin-Yu Zhang & Wen-Bo Wu & Yong Li & Zhu-Sheng Lou, 2021. "Pricing Exotic Option Under Jump-Diffusion Models by the Quadrature Method," Computational Economics, Springer;Society for Computational Economics, vol. 58(3), pages 867-884, October.
    • Handle: RePEc:kap:compec:v:58:y:2021:i:3:d:10.1007_s10614-020-10055-9
    DOI: 10.1007/s10614-020-10055-9
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    References listed on IDEAS

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    More about this item

    Keywords

    Finance; Discrete path-dependent options; Quadrature; Jump-diffusion model; Option hedging;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques

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