We develop and study stability properties of a hybrid approximation of functionals of the Bates jump model with stochastic interest rate that uses a tree method in the direction of the volatility and the interest rate and a finite-difference approach in order to handle the underlying asset price process. We also propose hybrid simulations for the model, following a binomial tree in the direction of both the volatility and the interest rate, and a space-continuous approximation for the underlying asset price process coming from a Euler-Maruyama type scheme. We test our numerical schemes by computing European and American option prices.
Briani, M., Caramellino, L., Terenzi, G., Zanette, A. (2019). NUMERICAL STABILITY of A HYBRID METHOD for PRICING OPTIONS. INTERNATIONAL JOURNAL OF THEORETICAL AND APPLIED FINANCE, 22(7), 1950036 [10.1142/S0219024919500365].
NUMERICAL STABILITY of A HYBRID METHOD for PRICING OPTIONS
Briani M.;Caramellino L.
;Terenzi G.;
2019-01-01
Abstract
We develop and study stability properties of a hybrid approximation of functionals of the Bates jump model with stochastic interest rate that uses a tree method in the direction of the volatility and the interest rate and a finite-difference approach in order to handle the underlying asset price process. We also propose hybrid simulations for the model, following a binomial tree in the direction of both the volatility and the interest rate, and a space-continuous approximation for the underlying asset price process coming from a Euler-Maruyama type scheme. We test our numerical schemes by computing European and American option prices.| File | Dimensione | Formato | |
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