A Closed-Form Approximation to the Stochastic-Volatility Jump-Diffusion Option Pricing Model

Abstract

The risk-neutral pricing partial differential equation from a stochastic-volatility jump-diffusion model for a European call option is solved approximately using a regular perturbation and Green's function method. The closed-form approximate solution provides the same accuracy as the Heston model in in-sample and out-of-sample tests of S&P500 option pricing, with one to two orders of magnitude less computation time and much ease of numerical convergence.