Computing American option prices in the lognormal jump–diffusion framework with a Markov chain

This note examines a numerical approach for computing American option prices in the lognormal jump–diffusion context. The approach uses the known transition density of the process to build a discrete-time, homogenous Markov chain to approximate the target jump–diffusion process. Numerical results showing the performance of the proposed method are examined.

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Year of publication:	2011
Authors:	Simonato, Jean-Guy
Published in:	Finance Research Letters. - Elsevier, ISSN 1544-6123. - Vol. 8.2011, 4, p. 220-226
Publisher:	Elsevier
Subject:	American option \| Jump–diffusion \| Markov chain

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Type of publication:	Article
Classification:	C60 - Mathematical Methods and Programming. General ; C61 - Optimization Techniques; Programming Models; Dynamic Analysis ; C63 - Computational Techniques ; G13 - Contingent Pricing; Futures Pricing
Source:	RePEc - Research Papers in Economics

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