IDEAS home Printed from
   My bibliography  Save this paper

A Numerical Study of Radial Basis Function Based Methods for Options Pricing under the One Dimension Jump-diffusion Model


  • Ron T. L. Chan
  • Simon Hubbert


The aim of this chapter is to show how option prices in jump-diffusion models can be computed using meshless methods based on Radial Basis Function (RBF) interpolation. The RBF technique is demonstrated by solving the partial integro-differential equation (PIDE) in one-dimension for the American put and the European vanilla call/put options on dividend-paying stocks in the Merton and Kou jump-diffusion models. The radial basis function we select is the Cubic Spline. We also propose a simple numerical algorithm for finding a finite computational range of an improper integral term in the PIDE so that the accuracy of approximation of the integral can be improved. Moreover, the solution functions of the PIDE are approximated explicitly by RBFs which have exact forms so we can easily compute the global integral by any kind of numerical quadrature. Finally, we will not only show numerically that our scheme is second order accurate in both spatial and time variables in a European case but also second order accurate in spatial variables and first order accurate in time variables in an American case.

Suggested Citation

  • Ron T. L. Chan & Simon Hubbert, 2010. "A Numerical Study of Radial Basis Function Based Methods for Options Pricing under the One Dimension Jump-diffusion Model," Papers 1011.5650,, revised Oct 2011.
  • Handle: RePEc:arx:papers:1011.5650

    Download full text from publisher

    File URL:
    File Function: Latest version
    Download Restriction: no

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:arx:papers:1011.5650. 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: (arXiv administrators). General contact details of provider: .

    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.

    We have no references for this item. You can help adding them by using 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.