Pricing Options under Jump-Diffusion Models by Adaptive Radial Basic Functions


Chan, R., 2010. Pricing Options under Jump-Diffusion Models by Adaptive Radial Basic Functions. Working Paper. Bath, U. K.: Department of Economics, University of Bath. (Bath Economics Research Working Papers; 06/10)

Related documents:

PDF (Bath_Economics_Research_WP_0610.pdf) - Requires a PDF viewer such as GSview, Xpdf or Adobe Acrobat Reader
Download (2272kB) | Preview

    Official URL:


    The aim of this paper is to show that option prices in jump-diffusion models can be computed using meshless methods based on Radial Basis Function (RBF) interpolation instead of traditional mesh-based methods like Finite Differences (FDM) or Finite Elements (FEM). The RBF technique is demonstrated by solving the partial integro-differential equation for American and European options on non-dividend-paying stocks in the Merton jump-diffusion model, using the Inverse Multiquadric Radial Basis Function (IMQ). The method can in principle be extended to Levy-models. Moreover, an adaptive method is proposed to tackle the accuracy problem caused by a singularity in the initial condition so that the accuracy in option pricing in particular for small time to maturity can be improved.


    Item Type Reports/Papers (Working Paper)
    CreatorsChan, R.
    Uncontrolled Keywordsthe merton jump-diffusions model,singularity,option pricing,adaptive method,radial basis function,levy processes,parabolic partial integro-differential equations
    DepartmentsFaculty of Humanities & Social Sciences > Economics
    Research CentresBath Economics Research
    ID Code19329
    Additional InformationID number: 06/10


    Actions (login required)

    View Item

    Document Downloads

    More statistics for this item...