Homotopy perturbation transform method for pricing under pure diffusion models with affine coefficients
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Date
Authors
Moutsinga, Claude Rodrigue Bambe
Pindza, Edson
Mare, Eben
Journal Title
Journal ISSN
Volume Title
Publisher
Elsevier
Abstract
Most existing multivariate models in finance are based on diffusion models. These models
typically lead to the need of solving systems of Riccati differential equations. In this paper, we
introduce an efficient method for solving systems of stiff Riccati differential equations. In this technique,
a combination of Laplace transform and homotopy perturbation methods is considered as
an algorithm to the exact solution of the nonlinear Riccati equations. The resulting technique is
applied to solving stiff diffusion model problems that include interest rates models as well as two
and three-factor stochastic volatility models. We show that the present approach is relatively easy,
efficient and highly accurate.
Description
Keywords
Diffusion model, Interest rate, Stochastic volatility, Stiffness, Laplace transform, Homotopy perturbation method
Sustainable Development Goals
Citation
Moutsinga, C.R.B., Pindza, E. & Mare, E. 2018, 'Homotopy perturbation transform method for pricing under pure diffusion models with affine coefficients', Journal of King Saud University–Science, vol. 30, no. 1, pp. 1-13.