Journal of Computational and Applied Mathematics
Numerical analysis of American option pricing in a jump-diffusion model
Mathematics of Operations Research
Penalty methods for American options with stochastic volatility
Journal of Computational and Applied Mathematics
Applied Numerical Mathematics
Quadratic Convergence for Valuing American Options Using a Penalty Method
SIAM Journal on Scientific Computing
Far Field Boundary Conditions for Black--Scholes Equations
SIAM Journal on Numerical Analysis
Iterative Methods for Sparse Linear Systems
Iterative Methods for Sparse Linear Systems
A Jump-Diffusion Model for Option Pricing
Management Science
Application of the Fast Gauss Transform to Option Pricing
Management Science
A penalty method for American options with jump diffusion processes
Numerische Mathematik
Numerical valuation of options with jumps in the underlying
Applied Numerical Mathematics
Fast Numerical Solution of Parabolic Integrodifferential Equations with Applications in Finance
SIAM Journal on Scientific Computing
A Finite Difference Scheme for Option Pricing in Jump Diffusion and Exponential Lévy Models
SIAM Journal on Numerical Analysis
Computers & Mathematics with Applications
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Under the assumption that two financial assets evolve by correlated finite activity jumps superimposed on correlated Brownian motion, the value of a contingent claim written on these two assets is given by a two-dimensional parabolic partial integro-differential equation (PIDE). An implicit, finite difference method is derived in this paper. This approach avoids a dense linear system solution by combining a fixed point iteration scheme with an FFT. The method prices both American and European style contracts independent (under some simple restrictions) of the option payoff and distribution of jumps. Convergence under the localization from the infinite to a finite domain is investigated, as are the theoretical conditions for the stability of the discrete approximation under maximum and von Neumann analysis. The analysis shows that the fixed point iteration is rapidly convergent under typical market parameters. The rapid convergence of the fixed point iteration is verified in some numerical tests. These tests also indicate that the method used to localize the PIDE is inexpensive and easily implemented.