A RBF based finite difference method for option pricing under regime-switching jump-diffusion model |
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Authors: | Alpesh Kumar B. V. Rathish Kumar |
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Affiliation: | 1. Department of Mathematics, Rajiv Gandhi Institute of Petroleum Technology, Amethi, India;2. alpeshk@rgipt.ac.in alpeshmath@gmail.com;4. Department of Mathematics and Statistics, Indian Institute of Technology Kanpur, Kanpur, India |
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Abstract: | AbstractIn this article, we presented a method for option pricing problem under regime-switching jump-diffusion models. We have proposed a numerical method for solving a partial integro-differential equation (PIDE) for pricing European option and for solving linear complementarity problem (LCP), to evaluate the price of American options. We use implicit explicit method for time semi discretization, followed by radial basis function based finite difference (RBF-FD) method for spatial discretization to solve PIDE. The proposed method is further extended to solve the LCP by coupling it with operator splitting method. Numerical simulation is done for European and American option to demonstrate efficiency and accuracy of the proposed method. |
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Keywords: | Radial basis function finite difference option pricing operator splitting method |
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