NUMERICAL STABILITY OF A HYBRID METHOD FOR PRICING OPTIONS

Author:

BRIANI MAYA1,CARAMELLINO LUCIA2ORCID,TERENZI GIULIA2,ZANETTE ANTONINO3

Affiliation:

1. Istituto per le Applicazioni del Calcolo “M. Picone”, Consiglio Nazionale delle Ricerche, Via dei Taurini 19, 00185 Rome, Italy

2. Dipartimento di Matematica, Università di Roma “Tor Vergata”, Via della Ricerca Scientifica 1, 00133, Rome, Italy

3. Dipartimento di Scienze Economiche e Statistiche, Università di Udine, via Palladio 8, 33100 Udine, Italy

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 test our numerical schemes by computing European and American option prices.

Funder

MIUR Excellence Department Project

Publisher

World Scientific Pub Co Pte Lt

Subject

General Economics, Econometrics and Finance,Finance

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