Event-driven uncertainties such as corporate defaults, operational failures, or central bank announcements are important elements in the modeling of financial quantities. Therefore, stochastic differential equations (SDEs) of jump-diffusion type are often used in finance. We consider in this paper weak discrete time approximations of jump-diffusion SDEs which are appropriate for problems such as derivative pricing and the evaluation of risk measures. We present regular and jump-adapted predictor-corrector schemes with first and second order of weak convergence. The regular schemes are constructed on regular time discretizations that do not include jump times, while the jump-adapted schemes are based on time discretizations that include all jump times. A numerical analysis of the accuracy of these schemes when applied to the jump-diffusion Merton model is provided.
CITATION STYLE
Bruti-Liberati, N., & Platen, E. (2012). On Weak Predictor-Corrector Schemes for Jump-Diffusion Processes in Finance. In Springer Proceedings in Mathematics and Statistics (Vol. 19, pp. 3–13). Springer New York LLC. https://doi.org/10.1007/978-1-4614-3433-7_1
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