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  • P-ISSN1226-0657
  • E-ISSN2287-6081
  • KCI

ISSN : 1226-0657

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Vol.27 No.4

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AN EFFICIENT AND ROBUST NUMERICAL METHOD FOR OPTION PRICES IN A TWO-ASSET JUMP-DIFFUSION MODEL

Journal of the Korean Society of Mathematical Education Series B: The Pure and Applied Mathematics / Journal of the Korean Society of Mathematical Education Series B: The Pure and Applied Mathematics, (P)1226-0657; (E)2287-6081
2020, v.27 no.4, pp.231-249
https://doi.org/https://doi.org/10.7468/jksmeb.2020.27.4.231
Lee, Chaeyoung
Wang, Jian
Jang, Hanbyeol
Han, Hyunsoo
Lee, Seongjin
Lee, Wonjin
Yang, Kisung
Kim, Junseok
Lee,, C. , Wang,, J. , Jang,, H. , Han,, H. , Lee,, S. , Lee,, W. , Yang,, K. , & Kim,, J. (2020). AN EFFICIENT AND ROBUST NUMERICAL METHOD FOR OPTION PRICES IN A TWO-ASSET JUMP-DIFFUSION MODEL. Journal of the Korean Society of Mathematical Education Series B: The Pure and Applied Mathematics, 27(4), 231-249, https://doi.org/https://doi.org/10.7468/jksmeb.2020.27.4.231

Abstract

We present an efficient and robust finite difference method for a two-asset jump diffusion model, which is a partial integro-differential equation (PIDE). To speed up a computational time, we compute a matrix so that we can calculate the non-local integral term fast by a simple matrix-vector operation. In addition, we use bilinear interpolation to solve integral term of PIDE. We can obtain more stable value by using the payoff-consistent extrapolation. We provide numerical experiments to demonstrate a performance of the proposed numerical method. The numerical results show the robustness and accuracy of the proposed method.

keywords
jump-diffusion, Simpson's rule, non-uniform grid, implicit finite difference method, derivative securities

Journal of the Korean Society of Mathematical Education Series B: The Pure and Applied Mathematics

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