High-order compact finite difference scheme for option pricing in stochastic volatility with contemporaneous jump models

2018/10/30 by Düring, Bertram, Pitkin, Alexander
#35Q91 #65M06 #91G20 #Computational Finance (q-fin.CP) #FOS: Economics and business

paper · doi:10.48550/arxiv.1810.13248

Abstract

We extend the scheme developed in B. Düring, A. Pitkin, "High-order compact finite difference scheme for option pricing in stochastic volatility jump models", 2019, to the so-called stochastic volatility with contemporaneous jumps (SVCJ) model, derived by Duffie, Pan and Singleton. The performance of the scheme is assessed through a number of numerical experiments, using comparisons against a standard second-order central difference scheme. We observe that the new high-order compact scheme achieves fourth order convergence and discuss the effects on efficiency and computation time.

Related

• Essentially high-order compact schemes with application to stochastic volatility models on non-uniform grids
• Compact finite difference method for pricing European and American\n options under jump-diffusion models
• High-Order Splitting Methods for Forward PDEs and PIDEs
• LSV models with stochastic interest rates and correlated jumps
• Efficient hedging in Bates model using high-order compact finite differences