NDLI: American Put Option Pricing for Stochastic-Volatility, Jump-Diffusion Models

Content Provider	IEEE Xplore Digital Library
Author	Hanson, F.B. Guoqing Yan
Copyright Year	2007
Description	Author affiliation: Univ. of Illinois at Chicago, Chicago (Hanson, F.B.; Guoqing Yan)
Abstract	The numerical treatment for the American put option pricing is discussed for a stochastic-volatility, jump- diffusion (SVJD) model with log-uniform jump amplitudes. Heston's (1993) mean reverting, square-root stochastic volatility model is used along with our uniform jump-amplitude model. However, computation is needed for nonlinear and multidimensional terms with dependence on the combined stock and volatility state space. A systematic finite difference formulation of the American put partial integro-differential complementary problem (PIDCP) is implemented using a successive over-relaxtion method projected on the maximum payoff function. Interpolation is used to construct the smooth transition to the payoff of the corresponding free boundary problem. Also, a fast, but less accurate, heuristic quadratic approximation, originally due to MacMillan (1986), is corrected and extended from pure diffusion models. The fast and simple quadratic approximation is compared with a more accurate PIDCP formulation. The simple quadratic approximation is briefly compared with market data.
Starting Page	384
Ending Page	389
File Size	343883
Page Count	6
File Format	PDF
ISBN	1424409888
ISSN	07431619
DOI	10.1109/ACC.2007.4283124
Language	English
Publisher	Institute of Electrical and Electronics Engineers, Inc. (IEEE)
Publisher Date	2007-07-09
Publisher Place	USA
Access Restriction	Subscribed
Rights Holder	Institute of Electrical and Electronics Engineers, Inc. (IEEE)
Subject Keyword	Pricing Stochastic processes Finite difference methods Security Cities and towns Multidimensional systems State-space methods Interpolation Approximation methods Contracts linear complementary problem stochastic volatility jump diffusion uniform jump-amplitudes American option put pricing quadratic approximation
Content Type	Text
Resource Type	Article
Subject	Electrical and Electronic Engineering

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