Numerical method for a system of PIDEs arising in American contingent claims under FMLS model with jump diffusion and regime-switching process
Summary: This paper investigates a numerical method for solving fractional partial integro-differential equations (FPIDEs) arising in American Contingent Claims, which follow finite moment log-stable process (FMLS) with jump diffusion and regime switching. Mathematically, the prices of American Contingent Claims satisfy a system of \(d\) problems with free-boundary values, where \(d\) is the number of regimes of the market. In addition, an optimal exercise boundary is needed to setup with each regime. Therefore, a fully implicit scheme based on the penalty term is arranged. In the end, numerical examples are carried out to verify the obtained theoretical results, and the impacts of state variables in our model on the optimal exercise boundary of American Contingent Claims are analyzed.
scientific article; zbMATH DE number 7383429