Accurate and efficient pricing of vanilla stock options via the Crandall-Douglas scheme. (Q1399766): Difference between revisions
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English | Accurate and efficient pricing of vanilla stock options via the Crandall-Douglas scheme. |
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Accurate and efficient pricing of vanilla stock options via the Crandall-Douglas scheme. (English)
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30 July 2003
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The authors present a highly efficient and accurate numerical procedure for pricing vanilla stock options. The nexus of proposed numerical approximation was the Crandall-Douglas scheme for the discretization of the diffusion operator. This scheme is fourth-order accurate and unconditionally stable. For European options, numerical simulations demonstrated its superiority over competing finite difference scheme. When applied to the variational inequality for American options, the Crandall-Douglas scheme produces a linear complementary problem to be solved at each time step. The resulting time evolution matrix has been shown to be a tridiagonal \(M\)-matrix. It is observed that the sign properties of the linear complementary problem vector \(q\) permit application of the Elliot-Ockendon scheme. Thus, each linear complementary problem which arises may be solved using only \(O(N)\) arithmetic operations. Proposed technique is second-order accurate in time, fourth-order accurate in space, involves a computational stencil of only six points, and runs in linear time.
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numerical procedure
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pricing vanilla stock options
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Crandall-Douglas scheme
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discretization of the diffusion operator
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fourth-order accurate
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variational inequality
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