A Flexible Galerkin Scheme for Option Pricing in L\'evy Models

Maximilian Ga{\ss} and Kathrin Glau

Papers from arXiv.org

Abstract: One popular approach to option pricing in L\'evy models is through solving the related partial integro differential equation (PIDE). For the numerical solution of such equations powerful Galerkin methods have been put forward e.g. by Hilber et al. (2013). As in practice large classes of models are maintained simultaneously, flexibility in the driving L\'evy model is crucial for the implementation of these powerful tools. In this article we provide such a flexible finite element Galerkin method. To this end we exploit the Fourier representation of the infinitesimal generator, i.e. the related symbol, which is explicitly available for the most relevant L\'evy models. Empirical studies for the Merton, NIG and CGMY model confirm the numerical feasibility of the method.

Date: 2016-03
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