A second-order difference scheme for the penalized Black-Scholes equation governing American put option pricing

DOI10.1007/s10614-011-9268-9zbMath1254.91744OpenAlexW1995718228MaRDI QIDQ1930396

Zhongdi Cen, Aimin Xu, Anbo Le

Publication date: 11 January 2013

Published in: Computational Economics (Search for Journal in Brave)

Full work available at URL: https://doi.org/10.1007/s10614-011-9268-9

zbMATH Keywords

central difference schemeBlack-Scholes equationpiecewise uniform meshoption valuationpower penalty method

Mathematics Subject Classification ID

Numerical methods (including Monte Carlo methods) (91G60) Finite difference methods for initial value and initial-boundary value problems involving PDEs (65M06) Stability and convergence of numerical methods for initial value and initial-boundary value problems involving PDEs (65M12) Derivative securities (option pricing, hedging, etc.) (91G20) Error bounds for initial value and initial-boundary value problems involving PDEs (65M15)

Related Items (6)

An efficient numerical method for pricing a Russian option with a finite time horizon ⋮ Exponential time integration and second-order difference scheme for a generalized Black-Scholes equation ⋮ The randomized American option as a classical solution to the penalized problem ⋮ Pricing a resettable convertible bond based on decomposition method and PDE models ⋮ A finite difference scheme for pricing American put options under Kou's jump-diffusion model ⋮ Cubic spline method for a generalized Black-Scholes equation

Cites Work

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• The Pricing of Options and Corporate Liabilities
• Variational inequalities and the pricing of American options
• A highly accurate linearized method for free boundary problems
• Convergence of a fitted finite volume method for the penalized Black-Scholes equation governing European and American option pricing
• An upwind approach for an American and European option pricing model
• Penalty methods for American options with stochastic volatility
• Operator splitting methods for American option pricing.
• Far Field Boundary Conditions for Black--Scholes Equations
• Quadratic Convergence for Valuing American Options Using a Penalty Method
• Option pricing: A simplified approach

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