A series solution of Black-Scholes equation under jump diffusion model

Kyoung Sook Moon, Hongjoong Kim, Yunju Jeong

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Abstract

We introduce a series solution for a partial integro-differential equation which arises in option pricing when the Black-Scholes partial differential equations are considered under jump diffusion models. We construct a polynomial chaos solution using the Taylor expansion with respect to Hermite polynomials, which simplifies the integral term and derives a system of deterministic ordinary differential equations. Numerical examples show that the proposed method efficiently gives the desired accuracy for pricing options.

Original languageEnglish
JournalEconomic Computation and Economic Cybernetics Studies and Research
Volume48
Issue number1
Publication statusPublished - 2014 Jan 1

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ASJC Scopus subject areas

  • Economics and Econometrics
  • Computer Science Applications
  • Applied Mathematics

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