Markov Chain Approximation Method for Pricing Barrier Options with Stochastic Volatility and Jump

DOI

10.2991/mcei-15.2015.33How to use a DOI?

Keywords

Barrier option; Option pricing; Markon chain; Stochastic volatility; Jump diffusion

Abstract

The purpose of this paper is to provide an efficient pricing method for barrier option with stochastic volatility and jump risk. First, by constructing a nonuniform variance grid and using local consistency arguments this paper approximates the stochastic volatility jump-diffusion model with a finite and dense Markov chain; Then, the paper computes the rate matrix of the Markov chain by solving a system induced by local consistency conditions; And then the paper provides the character function of the Markov chain. At last, using Markov chain approximation method and Fourier transform technique the paper obtains numerical solutions for barrier options pricing. Numerical results show that comparing with the Monte Carlo simulation, the proposed pricing technique is accurate, fast and easy to implement.

Copyright

© 2015, the Authors. Published by Atlantis Press.

Open Access

This is an open access article distributed under the CC BY-NC license (http://creativecommons.org/licenses/by-nc/4.0/).

Download article (PDF)

TY  - CONF
AU  - Sumei Zhang
PY  - 2015/06
DA  - 2015/06
TI  - Markov Chain Approximation Method for Pricing Barrier Options with Stochastic Volatility and Jump
BT  - Proceedings of the International Conference on Management, Computer and Education Informatization
PB  - Atlantis Press
SP  - 123
EP  - 126
SN  - 2352-538X
UR  - https://doi.org/10.2991/mcei-15.2015.33
DO  - 10.2991/mcei-15.2015.33
ID  - Zhang2015/06
ER  -