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Numerical methods for solving PIDEs arising in swing option pricing under a two-factor mean-reverting model with jumps

Author

Listed:
  • Mustapha Regragui
  • Karel J. in 't Hout
  • Mich`ele Vanmaele
  • Fred Espen Benth

Abstract

This paper concerns the numerical valuation of swing options with discrete action times under a linear two-factor mean-reverting model with jumps. The resulting sequence of two-dimensional partial integro-differential equations (PIDEs) are convection-dominated and possess a nonlocal integral term due to the presence of jumps. Further, the initial function is nonsmooth. We propose various second-order numerical methods that can adequately handle these challenging features. The stability and convergence of these numerical methods are analysed theoretically. By ample numerical experiments, we confirm their second-order convergence behaviour.

Suggested Citation

  • Mustapha Regragui & Karel J. in 't Hout & Mich`ele Vanmaele & Fred Espen Benth, 2025. "Numerical methods for solving PIDEs arising in swing option pricing under a two-factor mean-reverting model with jumps," Papers 2511.01587, arXiv.org, revised Feb 2026.
    • Handle: RePEc:arx:papers:2511.01587
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    References listed on IDEAS

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    1. M. Dahlgren, 2005. "A Continuous Time Model to Price Commodity-Based Swing Options," Review of Derivatives Research, Springer, vol. 8(1), pages 27-47, June.
    2. Fred Espen Benth & Jan Kallsen & Thilo Meyer-Brandis, 2007. "A Non-Gaussian Ornstein-Uhlenbeck Process for Electricity Spot Price Modeling and Derivatives Pricing," Applied Mathematical Finance, Taylor & Francis Journals, vol. 14(2), pages 153-169.
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