On a semi-spectral method for pricing an option on a mean-reverting asset
We consider a risky asset following a mean-reverting stochastic process of the form [image omitted] We show that the (singular) diffusion equation which gives the value of a European option on S can be represented, upon expanding in Laguerre polynomials, by a tridiagonal infinite matrix. We analyse this matrix to show that the diffusion equation does indeed have a solution and truncate the matrix to give a simple, highly efficient method for the numerical calculation of the solution.
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Volume (Year): 2 (2002)
Issue (Month): 5 ()
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