A Comparison and Survey of Finite Difference Methods for Pricing American Options Under Finite Activity Jump-Diffusion Models

24 Pages Posted: 4 Mar 2012

See all articles by Santtu Salmi

Santtu Salmi

University of Jyväskylä - Department of Mathematical Information Technology

Jari Toivanen

University of Jyväskylä - Department of Mathematical Information Technology; Stanford University

Date Written: February 28, 2012

Abstract

Partial-integro differential formulations are often used for pricing American options under jump-diffusion models. A survey on such formulations and numerical methods for them is presented. A detailed description of six efficient methods based on a linear complementarity formulation and finite difference discretizations is given. Numerical experiments compare the performance of these methods for pricing American put options under finite activity jump models.

Keywords: jump-diffusion model, American option, linear complementarity problem, finite difference method, iterative method

JEL Classification: C63, G13

Suggested Citation

Salmi, Santtu and Toivanen, Jari, A Comparison and Survey of Finite Difference Methods for Pricing American Options Under Finite Activity Jump-Diffusion Models (February 28, 2012). Available at SSRN: https://ssrn.com/abstract=2013918 or http://dx.doi.org/10.2139/ssrn.2013918

Santtu Salmi (Contact Author)

University of Jyväskylä - Department of Mathematical Information Technology ( email )

P.O. Box 35 (Agora)
Jyvaskyla, 40014
Finland

Jari Toivanen

University of Jyväskylä - Department of Mathematical Information Technology ( email )

P.O. Box 35 (Agora)
Jyvaskyla, 40014
Finland

Stanford University ( email )

Stanford, CA 94305
United States

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