LOWER BOUND APPROXIMATION TO BASKET OPTION VALUES FOR LOCAL VOLATILITY JUMP-DIFFUSION MODELS

Guoping Xu () and Harry Zheng ()
Additional contact information
Guoping Xu: Citi, Citigroup Centre, London E14 5LB, UK
Harry Zheng: Department of Mathematics, Imperial College, London SW7 2AZ, UK

International Journal of Theoretical and Applied Finance (IJTAF), 2014, vol. 17, issue 01, 1-15

Abstract: In this paper, we derive an easily computed approximation to European basket call prices for a local volatility jump-diffusion model. We apply the asymptotic expansion method to find the approximate value of the lower bound of European basket call prices. If the local volatility function is time independent then there is a closed-form expression for the approximation. Numerical tests show that the suggested approximation is fast and accurate in comparison with the Monte Carlo (MC) and other approximation methods in the literature.

Keywords: Basket options valuation; local volatility jump-diffusion model; lower bound approximation; second order asymptotic expansion (search for similar items in EconPapers)
Date: 2014
References: View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://www.worldscientific.com/doi/abs/10.1142/S0219024914500071
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:ijtafx:v:17:y:2014:i:01:n:s0219024914500071

Ordering information: This journal article can be ordered from

DOI: 10.1142/S0219024914500071

Access Statistics for this article

International Journal of Theoretical and Applied Finance (IJTAF) is currently edited by L P Hughston

More articles in International Journal of Theoretical and Applied Finance (IJTAF) from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().