On a semi-spectral method for pricing an option on a mean-reverting asset

We consider a risky asset following a mean-reverting stochastic process of the form We show that the (singular) diffusion equation which gives the value of a European option on S can be represented, upon expanding in Laguerre polynomials, by a tridiagonal infinite matrix. We analyse this matrix to s...

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Bibliographic Details
Published inQuantitative finance Vol. 2; no. 5; pp. 337 - 345
Main Authors Bos, L P, Ware, A F, Pavlov, B S
Format Journal Article
LanguageEnglish
Published Routledge 01.10.2002
Taylor and Francis Journals
SeriesQuantitative Finance
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Summary:We consider a risky asset following a mean-reverting stochastic process of the form We show that the (singular) diffusion equation which gives the value of a European option on S can be represented, upon expanding in Laguerre polynomials, by a tridiagonal infinite matrix. We analyse this matrix to show that the diffusion equation does indeed have a solution and truncate the matrix to give a simple, highly efficient method for the numerical calculation of the solution.
ISSN:1469-7688
1469-7696
DOI:10.1088/1469-7688/2/5/302