Numerical Study of the Merton PIDE in Option Pricing

7 Pages Posted: 12 May 2020 Last revised: 26 May 2020

See all articles by Nicola Cantarutti

Nicola Cantarutti

ISEG Lisbon School of Economics and Management,Universidade de Lisboa

Date Written: April 18, 2020

Abstract

I present a complete numerical study of the implicit-explicit finite difference method used to solve partial integro-differential equations (PIDEs) arising in mathematical finance. The study considers the specific case of the Merton jump-diffusion model, which is used to compute prices of European call and put options. These PIDE prices are then compared with prices obtained by closed formula, Fourier inversion, and Monte Carlo methods.

Keywords: Merton model, option pricing, Lévy processes, finite difference method, PIDE

JEL Classification: C02, G10, G13

Suggested Citation

Cantarutti, Nicola, Numerical Study of the Merton PIDE in Option Pricing (April 18, 2020). Available at SSRN: https://ssrn.com/abstract=3579408 or http://dx.doi.org/10.2139/ssrn.3579408

Nicola Cantarutti (Contact Author)

ISEG Lisbon School of Economics and Management,Universidade de Lisboa ( email )

Rua do Quelhas 6
LISBOA, 1200-781
Portugal

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