Simultaneous Two-Dimensional Continuous-Time Markov Chain Approximation of Two-Dimensional Fully Coupled Markov Diffusion Processes

30 Pages Posted: 10 Oct 2019

See all articles by Yuejuan Xi

Yuejuan Xi

Nankai University

Kailin Ding

Nankai University - School of Mathematical Sciences

Ning Ning

University of Michigan at Ann Arbor

Date Written: September 28, 2019

Abstract

In this paper, we propose a novel simultaneous two-dimensional continuous-time Markov chain (CTMC) approximation method, in contrast to the existing double-layer approach, to approximate the general fully coupled Markov diffusion processes which cover all the classical models. Extensive simulation studies on different kinds of financial option pricing problems in the European, American, and barrier settings, confirm that the proposed methodology has superior accuracy and outperforms the widely applicable Monte Carlo (MC) simulation approach consistently.

Keywords: Finance, Option Pricing, Two-Dimensional Fully Coupled Markov Diffusion Processes, Continuous-Time Markov Chains

JEL Classification: 91G80, 93E11, 60J20

Suggested Citation

Xi, Yuejuan and Ding, Kailin and Ning, Ning, Simultaneous Two-Dimensional Continuous-Time Markov Chain Approximation of Two-Dimensional Fully Coupled Markov Diffusion Processes (September 28, 2019). Available at SSRN: https://ssrn.com/abstract=3461115 or http://dx.doi.org/10.2139/ssrn.3461115

Yuejuan Xi

Nankai University

94 Weijin Road
Tianjin, 300071
China

Kailin Ding

Nankai University - School of Mathematical Sciences ( email )

Weijin Road #94
Tianjin, 300071
China

Ning Ning (Contact Author)

University of Michigan at Ann Arbor

500 S. State Street
Ann Arbor, MI 48109
United States

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