Geodesic
Option valuation under the VG process by a DG method
Applications of Mathematics, Tome 66 (2021) no. 6, pp. 857-886.

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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.\looseness -1
DOI : 10.21136/AM.2021.0345-20
Classification : 35Q91, 65M15, 65M60, 91G60, 91G80
Keywords: option pricing; variance gamma process; integro-differential equation; American style options; discontinuous Galerkin method; semi-implicit discretization 
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     title = {Option valuation under the {VG} process by a {DG} method},
     journal = {Applications of Mathematics},
     pages = {857--886},
     publisher = {mathdoc},
     volume = {66},
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Hozman, Jiří; Tichý, Tomáš. Option valuation under the VG process by a DG method. Applications of Mathematics, Tome 66 (2021) no. 6, pp. 857-886. doi : 10.21136/AM.2021.0345-20. http://geodesic.mathdoc.fr/articles/10.21136/AM.2021.0345-20/

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