A finite difference method for pricing European and American options under a geometric Lévy process
dc.contributor.author | Chen, W. | |
dc.contributor.author | Wang, Song | |
dc.date.accessioned | 2017-01-30T14:45:59Z | |
dc.date.available | 2017-01-30T14:45:59Z | |
dc.date.created | 2015-10-29T04:09:29Z | |
dc.date.issued | 2015 | |
dc.identifier.citation | Chen, W. and Wang, S. 2015. A finite difference method for pricing European and American options under a geometric Lévy process. Journal of Industrial and Management Optimization. 11 (1): pp. 241-264. | |
dc.identifier.uri | http://hdl.handle.net/20.500.11937/40837 | |
dc.identifier.doi | 10.3934/jimo.2015.11.241 | |
dc.description.abstract |
In this paper we develop a numerical approach to a fractional-order differential Linear Complementarity Problem (LCP) arising in pricing European and American options under a geometric Lévy process. The LCP is first approximated by a nonlinear penalty fractional Black-Scholes (fBS) equation. We then propose a finite difference scheme for the penalty fBS equation. We show that both the continuous and the discretized fBS equations are uniquely solvable and establish the convergence of the numerical solution to the viscosity solution of the penalty fBS equation by proving the consistency, stability and monotonicity of the numerical scheme. We also show that the discretization has the 2nd-order truncation error in both the spatial and time mesh sizes. Numerical results are presented to demonstrate the accuracy and usefulness of the numerical method for pricing both European and American options under the geometric Lévy process. | |
dc.title | A finite difference method for pricing European and American options under a geometric Lévy process | |
dc.type | Journal Article | |
dcterms.source.volume | 11 | |
dcterms.source.number | 1 | |
dcterms.source.startPage | 241 | |
dcterms.source.endPage | 264 | |
dcterms.source.issn | 1547-5816 | |
dcterms.source.title | Journal of Industrial and Management Optimization | |
curtin.note |
This is a pre-copy-editing, author-produced PDF of an article accepted for publication in Journal of Industrial and Management Optimization following peer review. The definitive publisher-authenticated version Chen, W. and Wang, S. 2015. A finite difference method for pricing European and American options under a geometric Lévy process. Journal of Industrial and Management Optimization. 11 (1): pp. 241-264 is available online at: | |
curtin.department | Department of Mathematics and Statistics | |
curtin.accessStatus | Open access |