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Semi-analytic pricing of American options in time-dependent jump-diffusion models with exponential jumps

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  • Andrey Itkin
Abstract
In this paper we propose a semi-analytic approach to pricing American options for time-dependent jump-diffusions models with exponential jumps The idea of the method is to further generalize our approach developed for pricing barrier, [Itkin et al., 2021], and American, [Carr and Itkin, 2021; Itkin and Muravey, 2023], options in various time-dependent one factor and even stochastic volatility models. Our approach i) allows arbitrary dependencies of the model parameters on time; ii) reduces solution of the pricing problem for American options to a simpler problem of solving a system of an algebraic nonlinear equation for the exercise boundary and a linear Fredholm-Volterra equation for the the option price; iii) the options Greeks solve a similar Fredholm-Volterra linear equation obtained by just differentiating Eq. (25) by the required parameter. Once done, the American option price is presented in close form.

Suggested Citation

  • Andrey Itkin, 2023. "Semi-analytic pricing of American options in time-dependent jump-diffusion models with exponential jumps," Papers 2308.08760, arXiv.org, revised Feb 2024.
    • Handle: RePEc:arx:papers:2308.08760
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    References listed on IDEAS

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    1. Carl Chiarella & Andrew Ziogas, 2009. "American Call Options Under Jump-Diffusion Processes - A Fourier Transform Approach," Applied Mathematical Finance, Taylor & Francis Journals, vol. 16(1), pages 37-79.
    2. P. Carr & A. Itkin & D. Muravey, 2022. "Semi-analytical pricing of barrier options in the time-dependent Heston model," Papers 2202.06177, arXiv.org.
    3. Andrey Itkin & Peter Carr, 2012. "Using Pseudo-Parabolic and Fractional Equations for Option Pricing in Jump Diffusion Models," Computational Economics, Springer;Society for Computational Economics, vol. 40(1), pages 63-104, June.
    4. Andrey Itkin & Alexander Lipton & Dmitry Muravey, 2021. "Generalized Integral Transforms in Mathematical Finance," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number 12147, December.
    5. Peter Christoffersen & Kris Jacobs & Chayawat Ornthanalai, 2009. "Exploring Time-Varying Jump Intensities: Evidence from S&P500 Returns and Options," CIRANO Working Papers 2009s-34, CIRANO.
    6. S. G. Kou & Hui Wang, 2004. "Option Pricing Under a Double Exponential Jump Diffusion Model," Management Science, INFORMS, vol. 50(9), pages 1178-1192, September.
    7. Itkin, Andrey & Lipton, Alexander & Muravey, Dmitry, 2022. "Multilayer heat equations and their solutions via oscillating integral transforms," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 601(C).
    8. Andrey Itkin & Dmitry Muravey, 2023. "American options in time-dependent one-factor models: Semi-analytic pricing, numerical methods and ML support," Papers 2307.13870, arXiv.org.
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