Efficient Solution of Backward Jump-Diffusion PIDEs with Splitting and Matrix Exponentials

Andrey Itkin ()

Papers from arXiv.org

Abstract: We propose a new, unified approach to solving jump-diffusion partial integro-differential equations (PIDEs) that often appear in mathematical finance. Our method consists of the following steps. First, a second-order operator splitting on financial processes (diffusion and jumps) is applied to these PIDEs. To solve the diffusion equation, we use standard finite-difference methods, which for multi-dimensional problems could also include splitting on various dimensions. For the jump part, we transform the jump integral into a pseudo-differential operator. Then for various jump models we show how to construct an appropriate first and second order approximation on a grid which supersets the grid that we used for the diffusion part. These approximations make the scheme to be unconditionally stable in time and preserve positivity of the solution which is computed either via a matrix exponential, or via P{\'a}de approximation of the matrix exponent. Various numerical experiments are provided to justify these results.

Date: 2013-04, Revised 2014-04
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Citations: View citations in EconPapers (9)

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