A high order finite element scheme for pricing options under regime switching jump diffusion processes

Rambeerich, Nisha and Pantelous, Athanasios A ORCID: 0000-0001-5738-1471 (2016) A high order finite element scheme for pricing options under regime switching jump diffusion processes. Journal of Computational and Applied Mathematics, 300. pp. 83-96.

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Abstract

This paper considers the numerical pricing of European, American and Butterfly options whose asset price dynamics follow the regime switching jump diffusion process. In an incomplete market structure and using the no-arbitrage pricing principle, the option pricing problem under the jump modulated regime switching process is formulated as a set of coupled partial integro-differential equations describing different states of a Markov chain. We develop efficient numerical algorithms to approximate the spatial terms of the option pricing equations using linear and quadratic basis polynomial approximations and solve the resulting initial value problem using exponential time integration. Various numerical examples are given to demonstrate the superiority of our computational scheme with higher level of accuracy and faster convergence compared to existing methods for pricing options under the regime switching model.

Item Type:	Article
Uncontrolled Keywords:	European and American option, Regime switching model, Finite element method, Exponential time integration
Depositing User:	Symplectic Admin
Date Deposited:	11 Apr 2016 08:14
Last Modified:	16 Dec 2022 01:30
DOI:	10.1016/j.cam.2015.12.019
Related URLs:	Author Publisher
URI:	https://livrepository.liverpool.ac.uk/id/eprint/3000422