A hybrid computational approach for option pricing

Song-Ping Zhu and Xin-Jiang He
Additional contact information
Song-Ping Zhu: School of Mathematics and Applied Statistics, University of Wollongong, NSW 2522, Australia
Xin-Jiang He: School of Mathematics and Applied Statistics, University of Wollongong, NSW 2522, Australia

International Journal of Financial Engineering (IJFE), 2018, vol. 05, issue 03, 1-16

Abstract: In this paper, we propose a novel numerical approach for option pricing with the combination of the MC (Monte Carlo) simulation and the PDE (partial differential equation) approach. Our motivation originates from the fact that within a finite life time of an option contract, the underlying price as well as the range of volatility are expected to vary within a relatively small region centered around the current value of the underlying and the volatility and hence there is no need to compute option prices for the underlying and the volatility values beyond this region. Thus, our hybrid approach takes the advantage of both the MC simulation and PDE approach to form an approach that takes the MC simulation as a special case with the region being extremely small and the PDE approach as another special case with the region being extremely large. Through numerical experiments, we demonstrate that such a hybrid approach enhances computational efficiency, while maintaining the same level of accuracy when either the MC simulation or the PDE approach is used alone for the option prices computed within a suitably chosen interested region.

Keywords: Combination; Monte Carlo; ADI; efficiency (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://www.worldscientific.com/doi/abs/10.1142/S2424786318500214
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wsi:ijfexx:v:05:y:2018:i:03:n:s2424786318500214

Ordering information: This journal article can be ordered from

DOI: 10.1142/S2424786318500214

Access Statistics for this article

International Journal of Financial Engineering (IJFE) is currently edited by George Yuan

More articles in International Journal of Financial Engineering (IJFE) from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().