EconPapers    
Economics at your fingertips  
 

Using Multivariate Densities to Assign Lattice Probabilities When There Are Jumps

Jimmy E. Hilliard and Jitka Hilliard

Journal of Futures Markets, 2015, vol. 35, issue 4, 385-398

Abstract: The lattice approximation to a continuous time process is an especially useful way to value American and real options. We choose lattice probabilities by extending density matching for diffusions to density matching for jump diffusions. Technically, this requires that diffusion and jump components be cast as independent state variables. In this setup, the diffusion probabilities are locally normal and the jump probabilities are locally a mixture of distributions. The lattice is structurally uniform and density matching ensures that all probabilities are legitimate without requiring jumps to non‐adjacent nodes. The approach generalizes easily to several state variables, does not require node adjustments, and does not appear to be dominated by more specialized numerical algorithms. We demonstrate the model for scenarios where the option may depend on a jump diffusion with possible stochastic interest rates and convenience yields. © 2014 Wiley Periodicals, Inc. Jrl Fut Mark 35:385–398, 2015

Date: 2015
References: Add references at CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
http://hdl.handle.net/

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:wly:jfutmk:v:35:y:2015:i:4:p:385-398

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=0270-7314

Access Statistics for this article

Journal of Futures Markets is currently edited by Robert I. Webb

More articles in Journal of Futures Markets from John Wiley & Sons, Ltd.
Bibliographic data for series maintained by Wiley Content Delivery ().

 
Page updated 2019-03-19
Handle: RePEc:wly:jfutmk:v:35:y:2015:i:4:p:385-398