Numerical analysis on binomial tree methods for a jump-diffusion model

Abstract

This paper studies the numerical approximation for an European option pricing model with jump-diffusion. Equivalence of the Binomial tree method and an explicit difference scheme is discussed. The optimal error estimation of the Binomial tree approximation is also given. Another explicit difference scheme is constructed, which has higher accuracy than the Binomial tree method. Numerical results coincide with the theoretical results.