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.
2019
Pubblicato
Rilevanza internazionale
Articolo
Esperti anonimi
Settore MAT/06 - PROBABILITA' E STATISTICA MATEMATICA
English
Stochastic volatility; jump-diffusion process; European and American options; tree methods; finite-difference; numerical stability
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].
Briani, M; Caramellino, L; Terenzi, G; Zanette, A
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/2108/229160
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