Convergence Analysis for Continuous-Time Markov Chain Approximation of Stochastic Local Volatility Models: Option Pricing and Greeks

Ma, Jingtang; Yang, Wensheng; Cui, Zhenyu

doi:10.2139/ssrn.3716845

Convergence Analysis for Continuous-Time Markov Chain Approximation of Stochastic Local Volatility Models: Option Pricing and Greeks

20 Pages Posted: 4 Dec 2020

See all articles by Jingtang Ma

Jingtang Ma

School of Economic Mathematics and Collaborative Innovation Center of Financial Security

Zhenyu Cui

Stevens Institute of Technology - School of Business

Date Written: October 22, 2020

Abstract

This paper establishes the precise second order convergence rates of the continuous-time Markov chain (CTMC) approximation method for pricing options and calculating its Greeks under the general framework of stochastic local volatility models, which include the Heston and SABR models as special cases. Numerical examples confirm the theoretical findings.

Keywords: Continuous-time Markov chains, stochastic local volatility models, option pric-ing, Greeks, convergence rates

JEL Classification: C63, G13

Suggested Citation: Suggested Citation

Ma, Jingtang and Yang, Wensheng and Cui, Zhenyu, Convergence Analysis for Continuous-Time Markov Chain Approximation of Stochastic Local Volatility Models: Option Pricing and Greeks (October 22, 2020). Available at SSRN: https://ssrn.com/abstract=3716845 or http://dx.doi.org/10.2139/ssrn.3716845