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    Pricing of American put option under a jump diffusion process with stochastic volatility in an incomplete market

    Access Status
    Open access via publisher
    Authors
    Li, S.
    Zhou, Y.
    Ruan, X.
    Wiwatanapataphee, B
    Date
    2014
    Type
    Journal Article
    
    Metadata
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    Citation
    Li, S. and Zhou, Y. and Ruan, X. and Wiwatanapataphee, B. 2014. Pricing of American put option under a jump diffusion process with stochastic volatility in an incomplete market. Abstract and Applied Analysis. 2014: Article ID 236091.
    Source Title
    Abstract and Applied Analysis
    DOI
    10.1155/2014/236091
    ISSN
    1085-3375
    URI
    http://hdl.handle.net/20.500.11937/33888
    Collection
    • Curtin Research Publications
    Abstract

    We study the pricing of American options in an incomplete market in which the dynamics of the underlying risky asset is driven by a jump diffusion process with stochastic volatility. By employing a risk-minimization criterion, we obtain the Radon-Nikodym derivative for the minimal martingale measure and consequently a linear complementarity problem (LCP) for American option price. An iterative method is then established to solve the LCP problem for American put option price. Our numerical results show that the model and numerical scheme are robust in capturing the feature of incomplete finance market, particularly the influence of market volatility on the price of American options.

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