Basket Options Valuation for a Local Volatility Jump-Diffusion Model with the Asymptotic Expansion Method

16 Pages Posted: 30 Mar 2010

See all articles by Guoping Xu

Guoping Xu

Citi

Harry Zheng

Imperial College London - Mathematical Finance

Date Written: December 14, 2009

Abstract

In this paper we discuss the basket options valuation for a jump-diffusion model. The underlying asset prices follow some correlated local volatility diffusion processes with systematic jumps. We derive a forward partial integral differential equation (PIDE) for general stochastic processes and use the asymptotic expansion method to approximate the conditional expectation of the stochastic variance associated with the basket value process. The numerical tests show that the suggested method is fast and accurate in comparison with the Monte Carlo and other methods in most cases.

Keywords: Basket options pricing, local volatility jump-diffusion model, forward PIDE, asymptotic expansion

JEL Classification: G13

Suggested Citation

Xu, Guoping and Zheng, Harry, Basket Options Valuation for a Local Volatility Jump-Diffusion Model with the Asymptotic Expansion Method (December 14, 2009). Available at SSRN: https://ssrn.com/abstract=1578287 or http://dx.doi.org/10.2139/ssrn.1578287

Guoping Xu (Contact Author)

Citi ( email )

Exhibition Road
London, Greater London SW7 2AZ

Harry Zheng

Imperial College London - Mathematical Finance ( email )

United Kingdom

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
157
Abstract Views
1,406
Rank
353,926
PlumX Metrics