Journal
APPLIED NUMERICAL MATHEMATICS
Volume 115, Issue -, Pages 252-274Publisher
ELSEVIER
DOI: 10.1016/j.apnum.2017.01.015
Keywords
Stochastic volatility; American option; Merton jump diffusion; Meshless weak form; Wendland functions
Categories
Funding
- Iran National Science Foundation (INSF) [94028928]
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The most recent update of financial option models is American options under stochastic volatility models with jumps in returns (SVJ) and stochastic volatility models with jumps in returns and volatility (SVCJ). To evaluate these options, mesh-based methods are applied in a number of papers but it is well-known that these methods depend strongly on the mesh properties which is the major disadvantage of them. Therefore, we propose the use of the meshless methods to solve the aforementioned options models, especially in this work we select and analyze one scheme of them, named local radial point interpolation (LRPI) based on Wendland's compactly supported radial basis functions (WCS-RBFs) with C-6, C-4 and C-2 smoothness degrees. The LRPI method which is a special type of meshless local Petrov-Galerkin method (MLPG), offers several advantages over the mesh-based methods, nevertheless it has never been applied to option pricing, at least to the very best of our knowledge. These schemes are the truly meshless methods, because, a traditional non-overlapping continuous mesh is not required, neither for the construction of the shape functions, nor for the integration of the local sub-domains. In this work, the American option which is a free boundary problem, is reduced to a problem with fixed boundary using a Richardson extrapolation technique. Then the implicit-explicit (IMEX) time stepping scheme is employed for the time derivative. Numerical experiments are presented showing that the proposed approaches are extremely accurate and fast. (C) 2017 IMACS. Published by Elsevier B.V. All rights reserved.
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