RT info:eu-repo/semantics/article
T1 Incorporating boundary conditions in a stochastic volatility model for the numerical approximation of bond prices
A1 Gómez del Valle, María Lourdes
A1 López Marcos, Miguel Ángel
A1 Martínez Rodríguez, Julia
AB In this paper, we consider a two-factor interest rate model with stochastic volatil-ity, and we assume that the instantaneous interest rate follows a jump-diffusionprocess. In this kind of problems, a two-dimensional partial integro-differentialequation is derived for the values of zero-coupon bonds. To apply standardnumerical methods to this equation, it is customary to consider a boundeddomain and incorporate suitable boundary conditions. However, for thesetwo-dimensional interest rate models, there are not well-known boundary con-ditions, in general. Here, in order to approximate bond prices, we propose newboundary conditions, which maintain the discount function property of thezero-coupon bond price. Then, we illustrate the numerical approximation ofthe corresponding boundary value problem by means of an alternative directionimplicit method, which has been already applied for pricing options. We testthese boundary conditions with several interest rate pricing models.
PB Wiley
YR 2019
FD 2019
LK http://uvadoc.uva.es/handle/10324/37791
UL http://uvadoc.uva.es/handle/10324/37791
LA eng
NO Mathematical Methods in the Applied Sciences
NO Producción Científica
DS UVaDOC
RD 18-abr-2024