IDEAS home Printed from https://ideas.repec.org/a/rsk/journ0/2160398.html
   My bibliography  Save this article

A high-order front-tracking finite difference method for pricing American options under jump-diffusion models

Author

Listed:
  • Jari Toivanen

Abstract

ABSTRACT A free-boundary formulation is considered for the price of American options under jump-diffusion models with finite jump activity. On the free boundary a Cauchy boundary condition holds, due to the smoothpasting principle. An implicit finite difference discretization is performed on time-dependent non-uniform grids. During time stepping, solutions are interpolated from one grid to another, using Lagrange interpolations. Finite difference stencils are also constructed, using Lagrange interpolation polynomials, based on either three or five grid points. With these choices, second-order and fourth-order convergence with respect to the number of time and space steps can be expected. In numerical examples these convergence rates are observed under the Black-Scholes model and Kou's jump-diffusion model.

Suggested Citation

Handle: RePEc:rsk:journ0:2160398
as

Download full text from publisher

File URL: https://www.risk.net/system/files/import/protected/digital_assets/10340/A_high_order_front_tracking_finite_difference_method_for_pricing_American_options.pdf
Download Restriction: no
---><---

More about this item

Statistics

Access and download statistics

Corrections

All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:rsk:journ0:2160398. See general information about how to correct material in RePEc.

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

We have no bibliographic references for this item. You can help adding them by using this form .

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Thomas Paine (email available below). General contact details of provider: https://www.risk.net/journal-of-computational-finance .

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.