A hybrid Markov chain-tree valuation framework for stochastic volatility jump diffusion models

Abstract

We develop a unified hybrid valuation framework for computing option values under stochastic volatility (SV) models with a jump component. The proposed method originates from the tree method and regime switching approximation. Conditions on the choices of key parameters for the tree design are provided to guarantee the positivity of branch probabilities. We also prove the weak convergence of the proposed method to the true stochastic models. Numerical results are provided to illustrate the effectiveness of the proposed method.