Proceedings of the International Conference on Management, Computer and Education Informatization

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

Authors
Sumei Zhang
Corresponding Author
Sumei Zhang
Available Online June 2015.
DOI
https://doi.org/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.
Open Access
This is an open access article distributed under the CC BY-NC license.

Download article (PDF)

Proceedings
International Conference on Management, Computer and Education Informatization
Part of series
Advances in Computer Science Research
Publication Date
June 2015
ISBN
978-94-6252-118-6
ISSN
2352-538X
DOI
https://doi.org/10.2991/mcei-15.2015.33How to use a DOI?
Open Access
This is an open access article distributed under the CC BY-NC license.

Cite this article

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  - International Conference on Management, Computer and Education Informatization
PB  - Atlantis Press
SN  - 2352-538X
UR  - https://doi.org/10.2991/mcei-15.2015.33
DO  - https://doi.org/10.2991/mcei-15.2015.33
ID  - Zhang2015/06
ER  -