FFT based option pricing under a mean reverting process with stochastic volatility and jumps

Authors:
E. Pillay;J. G. O'Hara
Affiliations:
School of Statistics and Actuarial Science, University of KwaZulu-Natal, Private Bag X540001, Durban 4000, South Africa;Centre for Computational Finance and Economic Agents, University of Essex, Colchester CO4 3SQ, UK
Venue:
Journal of Computational and Applied Mathematics
Year:
2011

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Abstract

Numerous studies present strong empirical evidence that certain financial assets may exhibit mean reversion, stochastic volatility or jumps. This paper explores the valuation of European options when the underlying asset follows a mean reverting log-normal process with stochastic volatility and jumps. A closed form representation of the characteristic function of the process is derived for the computation of European option prices via the fast Fourier transform.