Pricing Basket Options under Local Stochastic Volatility with Jumps

Kenichiro Shiraya and Akihiko Takahashi
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Kenichiro Shiraya: Mizuho-DL Financial Technology Co., Ltd.
Akihiko Takahashi: The University of Tokyo

No CARF-F-336, CARF F-Series from Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo

Abstract: This paper develops a new approximation formula for pricing basket options in a local-stochastic volatility model with jumps. In particular, the model admits local volatility functions and jump components in not only the underlying asset price processes, but also the volatility processes. To the best of our knowledge, the proposed formula is the first one which achieves an analytical approximation for the basket option prices under this type of the models. Moreover, some numerical experiments confirm the validity of the method.

Pages: 41 pages
Date: 2013-12, Revised 2014-05
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Persistent link: https://EconPapers.repec.org/RePEc:cfi:fseres:cf336

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