Abstract and Applied Analysis

Pricing of American Put Option under a Jump Diffusion Process with Stochastic Volatility in an Incomplete Market

Shuang Li, Yanli Zhou, Xinfeng Ruan, and B. Wiwatanapataphee

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Abstract

We study the pricing of American options in an incomplete market in which the dynamics of the underlying risky asset is driven by a jump diffusion process with stochastic volatility. By employing a risk-minimization criterion, we obtain the Radon-Nikodym derivative for the minimal martingale measure and consequently a linear complementarity problem (LCP) for American option price. An iterative method is then established to solve the LCP problem for American put option price. Our numerical results show that the model and numerical scheme are robust in capturing the feature of incomplete finance market, particularly the influence of market volatility on the price of American options.

Article information

Source
Abstr. Appl. Anal., Volume 2014, Special Issue (2013), Article ID 236091, 8 pages.

Dates
First available in Project Euclid: 2 October 2014

Permanent link to this document
https://projecteuclid.org/euclid.aaa/1412279743

Digital Object Identifier
doi:10.1155/2014/236091

Mathematical Reviews number (MathSciNet)
MR3176725

Zentralblatt MATH identifier
07021968

Citation

Li, Shuang; Zhou, Yanli; Ruan, Xinfeng; Wiwatanapataphee, B. Pricing of American Put Option under a Jump Diffusion Process with Stochastic Volatility in an Incomplete Market. Abstr. Appl. Anal. 2014, Special Issue (2013), Article ID 236091, 8 pages. doi:10.1155/2014/236091. https://projecteuclid.org/euclid.aaa/1412279743


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