English

Pricing Derivatives under Self-Exciting Dynamics: A Finite-Difference and Transform Approach

Mathematical Finance 2026-03-16 v1 Pricing of Securities

Abstract

We consider the pricing of derivatives written on accumulated marks, such as weather derivatives or aggregate loss claims, using a self-exciting marked point process. The jump intensity mean-reverts between events and increases at jump times by an amount proportional to the mark. The resulting state process, where the variable UtU_t accumulates jump magnitudes, is a piecewise deterministic Markov process (PDMP). We derive the discounted pricing equation as a backward partial integro-differential equation (PIDE) in two spatial dimensions. To overcome the dimensionality, we propose an exponential (Laplace/Fourier) transform in the accumulated mark variable, which diagonalizes the translation operator and reduces the pricing problem to a family of one-dimensional PIDEs in the intensity variable along a Bromwich contour. For Gamma-mixture mark laws (under actuarial or Esscher-tilted measures), the nonlocal jump term is efficiently approximated by generalized Gauss--Laguerre quadrature. We solve the reduced PIDEs backward in time using a monotone IMEX finite difference scheme (implicit upwind drift and discounting, explicit jump operator) and recover option prices via numerical inversion. We provide a rigorous, term-by-term global error bound covering time and space discretization, quadrature, interpolation, and boundary effects, supported by numerical experiments and Monte Carlo benchmarks.

Keywords

Cite

@article{arxiv.2603.12602,
  title  = {Pricing Derivatives under Self-Exciting Dynamics: A Finite-Difference and Transform Approach},
  author = {Aqib Ahmed and Heiðar Eyjólfsson},
  journal= {arXiv preprint arXiv:2603.12602},
  year   = {2026}
}

Comments

32 pages, 6 figures. Submitted to Decisions in Economics and Finance

R2 v1 2026-07-01T11:17:49.811Z