Numerical stability of a hybrid method for pricing options
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 show that our methods allow to obtain efficient and accurate European and American option prices. Numerical experiments are provided, and show the reliability and the efficiency of the algorithms.
Cite
@article{arxiv.1603.07225,
title = {Numerical stability of a hybrid method for pricing options},
author = {Maya Briani and Lucia Caramellino and Giulia Terenzi and Antonino Zanette},
journal= {arXiv preprint arXiv:1603.07225},
year = {2019}
}
Comments
arXiv admin note: text overlap with arXiv:1503.03705