Lower Bound Approximation to Basket Option Values for Local Volatility Jump-Diffusion Models

11 Pages Posted: 29 Aug 2012

See all articles by Guoping Xu

Guoping Xu

Citi

Harry Zheng

Imperial College London - Mathematical Finance

Date Written: August 28, 2012

Abstract

In this paper we derive an easily computed approximation of Rogers and Shi’s lower bound for a local volatility jump-diffusion model and then use it to approximate European basket option values. If the local volatility function is time independent then there is a closed-form expression for the approximation. Numerical tests show that the lower bound approximation is fast and accurate in comparison with the Monte Carlo method, the partial-exact approximation method and the asymptotic expansion method.

Keywords: basket options valuation, local volatility jump-diffusion model, lower bound approximation, second order asymptotic expansion

JEL Classification: G13

Suggested Citation

Xu, Guoping and Zheng, Harry, Lower Bound Approximation to Basket Option Values for Local Volatility Jump-Diffusion Models (August 28, 2012). Available at SSRN: https://ssrn.com/abstract=2137502 or http://dx.doi.org/10.2139/ssrn.2137502

Guoping Xu (Contact Author)

Citi ( email )

Exhibition Road
London, Greater London SW7 2AZ

Harry Zheng

Imperial College London - Mathematical Finance ( email )

United Kingdom

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