Pricing Exotic Option Under Jump-Diffusion Models by the Quadrature Method

Jin-Yu Zhang, Wen-Bo Wu, Yong Li () and Zhu-Sheng Lou
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Jin-Yu Zhang: Nanjing Audit University
Wen-Bo Wu: Renmin University of China
Yong Li: Renmin University of China
Zhu-Sheng Lou: Renmin University of China

Computational Economics, 2021, vol. 58, issue 3, No 13, 867-884

Abstract: Abstract This paper extends the quadrature method to price exotic options under jump-diffusion models. We compute the transition density of jump-extended models using convolution integrals. Furthermore, a simpler and more efficient lattice grid is introduced to implement the recursion more directly in matrix form. It can be shown that a lot of running time can be saved. At last, we apply the developed approach to the different jump-extended models to demonstrate its universality and provide a detailed comparison for the discrete path-dependent options to demonstrate its advantages in terms of speed and accuracy.

Keywords: Finance; Discrete path-dependent options; Quadrature; Jump-diffusion model; Option hedging (search for similar items in EconPapers)
JEL-codes: C63 G13 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1007/s10614-020-10055-9

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