ADAPTIVE MESH MODELING AND BARRIER OPTION PRICING UNDER A JUMP‐DIFFUSION PROCESS

Michael Albert, Jason Fink and Kristin E. Fink

Journal of Financial Research, 2008, vol. 31, issue 4, 381-408

Abstract: The computational burden of numerical barrier option pricing is significant, even prohibitive, for some parameterizations—especially for more realistic models of underlying asset behavior, such as jump diffusions. We extend a binomial jump diffusion pricing algorithm into a trinomial setting and demonstrate how an adaptive mesh may fit into the model. Our result is a barrier option pricing method that employs fewer computational resources, reducing run times substantially. We demonstrate that this extension allows the pricing of options that were previously computationally infeasible and examine the parameterizations in which use of the adaptive mesh is most beneficial.

Date: 2008
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https://doi.org/10.1111/j.1475-6803.2008.00244.x

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Persistent link: https://EconPapers.repec.org/RePEc:bla:jfnres:v:31:y:2008:i:4:p:381-408

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