American option pricing under financial crisis

Xuemei Luo, Kaili Xiang and Chuan Ding

Applied Stochastic Models in Business and Industry, 2018, vol. 34, issue 5, 597-606

Abstract: In this paper, we take financial crisis into consideration for American call options and put options pricing problems by using a jump diffusion model. Under no‐arbitrage pricing principle, we obtain a PDE (partial differential equation), which is different from the PDE derived from the classical Black‐Scholes model, it adds a postcrash market index to the primary equation. Then, we introduce the penalty method for solving the nonlinear PDE. Numerical results suggest that the option value will be affected by the crash.

Date: 2018
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https://doi.org/10.1002/asmb.2310

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Persistent link: https://EconPapers.repec.org/RePEc:wly:apsmbi:v:34:y:2018:i:5:p:597-606

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