Option valuation under the VG process by a DG method. (English) Zbl 07442410

Summary: The paper presents a discontinuous Galerkin method for solving partial integro-differential equations arising from the European as well as American option pricing when the underlying asset follows an exponential variance gamma process. For practical purposes of numerical solving we introduce the modified option pricing problem resulting from a localization to a bounded domain and an approximation of small jumps, and we discuss the related error estimates. Then we employ a robust numerical procedure based on piecewise polynomial generally discontinuous approximations in the spatial domain. This technique enables a simple treatment of the American early exercise constraint by a direct encompassing it as an additional nonlinear source term to the governing equation. Special attention is paid to the proper discretization of non-local jump integral components, which is based on splitting integrals with respect to the domain according to the size of the jumps. Moreover, to preserve sparsity of resulting linear algebraic systems the pricing equation is integrated in the temporal variable by a semi-implicit Euler scheme. Finally, the numerical results demonstrate the capability of the numerical scheme presented within the reference benchmarks.


65M60 Finite element, Rayleigh-Ritz and Galerkin methods for initial value and initial-boundary value problems involving PDEs
35Q91 PDEs in connection with game theory, economics, social and behavioral sciences
65M15 Error bounds for initial value and initial-boundary value problems involving PDEs
91G60 Numerical methods (including Monte Carlo methods)
91G80 Financial applications of other theories
Full Text: DOI


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