Purchase - $38.00

Pricing Asian Options for Jump Diffusion

27 Pages Posted: 1 Jan 2011  

Erhan Bayraktar

University of Michigan at Ann Arbor - Department of Mathematics

Hao Xing

London School of Economics & Political Science (LSE)

Date Written: September 22, 2010

Abstract

We construct a sequence of functions that uniformly converge (on compact sets) to the price of an Asian option, which is written on a stock whose dynamics follow a jump diffusion. The convergence is exponentially fast. We show that each element in this sequence is the unique classical solution of a parabolic partial differential equation (not an integro-differential equation). As a result we obtain a fast numerical approximation scheme whose accuracy versus speed characteristics can be controlled. We analyze the performance of our numerical algorithm on several examples.

Keywords: pricing Asian options, jump diffusions, an iterative numerical scheme, classical solutions of integro partial differential equations

Suggested Citation

Bayraktar, Erhan and Xing, Hao, Pricing Asian Options for Jump Diffusion (September 22, 2010). Mathematical Finance, Vol. 21, Issue 1, pp. 117-143, 2010. Available at SSRN: https://ssrn.com/abstract=1732933 or http://dx.doi.org/10.1111/j.1467-9965.2010.00426.x

Erhan Bayraktar (Contact Author)

University of Michigan at Ann Arbor - Department of Mathematics ( email )

2074 East Hall
530 Church Street
Ann Arbor, MI 48109-1043
United States

Hao Xing

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Paper statistics

Downloads
2
Abstract Views
393