Testing the Closed-Form Spread Option Pricing Formula Based on Gauss-Hermite Quadrature for a Jump-Diffusion Model

Xenos Chang-Shuo Lin (), Daniel Wei-Chung Miao () and Emma En-Tze Chang ()
Additional contact information
Xenos Chang-Shuo Lin: Aletheia University
Daniel Wei-Chung Miao: National Taiwan University of Science and Technology
Emma En-Tze Chang: Yuanta Commercial Bank

Computational Economics, 2024, vol. 64, issue 5, No 12, 2879-2908

Abstract: Abstract In this paper we develop a closed-form spread option pricing formula based on Gauss-Hermite quadrature (GHQ) and show that the proposed method is a competitive method for the Black-Scholes model and is best-suited for the jump-diffusion model. The GHQ method turns the integral of spread option pricing formula into a summation of call option pricing formulas with adjusted parameters, and therefore the final formula remains in closed-form which ensures its computational advantage. Under the basic Black-Scholes model, the proposed GHQ formula provides equally nice accuracy compared to the best-performing LDZ formula in the literature. But for the extended jump-diffusion model, the LDZ formula sees a significant loss of accuracy due to the multi-layered summation, whereas the GHQ formula is still able to achieve very high accuracy at only slightly increased computing costs. Various closed-form formulas are tested in our numerical analysis which demonstrates that the proposed GHQ formula is the most recommended for pricing spread options under the jump-diffusion model.

Keywords: Spread option; Jump-diffusion model; Closed-form pricing formula; Gauss-Hermite quadrature (GHQ) (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s10614-023-10468-2 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

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:kap:compec:v:64:y:2024:i:5:d:10.1007_s10614-023-10468-2

Ordering information: This journal article can be ordered from
http://www.springer. ... ry/journal/10614/PS2

DOI: 10.1007/s10614-023-10468-2

Access Statistics for this article

Computational Economics is currently edited by Hans Amman

More articles in Computational Economics from Springer, Society for Computational Economics Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().