The Evaluation of American Option Prices Under Stochastic Volatility and Jump-Diffusion Dynamics Using the Method of Lines

@article{Chiarella2008TheEO,
  title={The Evaluation of American Option Prices Under Stochastic Volatility and Jump-Diffusion Dynamics Using the Method of Lines},
  author={Carl Chiarella and Boda Kang and Gunter H. Meyer and Andrew Ziogas},
  journal={Derivatives eJournal},
  year={2008}
}
This paper considers the problem of numerically evaluating American option prices when the dynamics of the underlying are driven by both stochastic volatility following the square root process of Heston [18], and by a Poisson jump process of the type originally introduced by Merton [25]. We develop a method of lines algorithm to evaluate the price as well as the delta and gamma of the option, thereby extending the method developed by Meyer [26] for the case of jump-diffusion dynamics. The… Expand
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