An efficient and accurate lattice for pricing derivatives under a jump-diffusion process

Chuan Ju Wang*, Tian-Shyr Dai, Yuh Dauh Lyuu, Yen Chun Liu

*Corresponding author for this work

Research output: Chapter in Book/Report/Conference proceedingConference contributionpeer-review

1 Scopus citations

Abstract

Derivatives are popular financial instruments that play essential roles in financial markets. However, most derivatives have no analytical formulas and must be priced by numerical methods such as lattice models. The pricing results generated by a lattice converge to the theoretical values, but they may converge slowly or even oscillate significantly due to the nonlinearity error. According to empirical studies, a lognormal diffusion process, which has been widely studied, does not capture the real world phenomena well. To address these problems, this paper proposes a novel lattice under the jump-diffusion processes. Our lattice is accurate because it suppresses the nonlinearity error. It is more efficient due to the fact that the time complexity of our lattice is lesser than those of the other existing lattice models. Numerous numerical calculations confirm the superior performance of our lattice model to the other existing methods.

Original languageEnglish
Title of host publication24th Annual ACM Symposium on Applied Computing, SAC 2009
Pages966-970
Number of pages5
DOIs
StatePublished - 1 Dec 2009
Event24th Annual ACM Symposium on Applied Computing, SAC 2009 - Honolulu, HI, United States
Duration: 8 Mar 200912 Mar 2009

Publication series

NameProceedings of the ACM Symposium on Applied Computing

Conference

Conference24th Annual ACM Symposium on Applied Computing, SAC 2009
CountryUnited States
CityHonolulu, HI
Period8/03/0912/03/09

Keywords

  • Complexity
  • Jump-diffusion process
  • Pricing algorithm

Fingerprint Dive into the research topics of 'An efficient and accurate lattice for pricing derivatives under a jump-diffusion process'. Together they form a unique fingerprint.

Cite this