TITLE:
Time Discretized Variational Iteration Method for the Stochastic Volatility Process with Jumps
AUTHORS:
Henrietta Ify Ojarikre, Ebimene James Mamadu
KEYWORDS:
Volatility, Equity Returns, Wiener Process, State Variable, Variance Process, Variational Iteration Method
JOURNAL NAME:
Advances in Pure Mathematics,
Vol.12 No.11,
November
23,
2022
ABSTRACT: A model for both stochastic jumps and volatility for equity returns in the area of option pricing is the stochastic volatility process with jumps (SVPJ). A major advantage of this model lies in the area of mean reversion and volatility clustering between returns and volatility with uphill movements in price asserts. Thus, in this article, we propose to solve the SVPJ model numerically through a discretized variational iteration method (DVIM) to obtain sample paths for the state variable and variance process at various timesteps and replications in order to estimate the expected jump times at various iterates resulting from executing the DVIM as n increases. These jumps help in estimating the degree of randomness in the financial market. It was observed that the average computed expected jump times for the state variable and variance process is moderated by the parameters (variance process through mean reversion), Θ (long-run mean of the variance process), σ (volatility variance process) and λ (constant intensity of the Poisson process) at each iterate. For instance, when = 0.0, Θ = 0.0, σ = 0.0 and λ = 1.0, the state variable cluttered maximally compared to the variance process with less volatility cluttering with an average computed expected jump times of 52.40607869 as n increases in the DVIM scheme. Similarly, when = 3.99, Θ = 0.014, σ = 0.27 and λ = 0.11, the stochastic jumps for the state variable are less cluttered compared to the variance process with maximum volatility cluttering as n increases in the DVIM scheme. In terms of option pricing, the value 52.40607869 suggest a better bargain compared to the value 20.40344029 due to the fact that it yields less volatility rate. MAPLE 18 software was used for all computations in this research.